Fourth Quarter GDP Growth

The BEA just released revisions to its estimate of fourth quarter GDP:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.8 percent in the fourth quarter of 2004, according to preliminary estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.0 percent.

The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the increase in real GDP was 3.1 percent (see “Revisions” on page 3).

The major contributors to the increase in real GDP in the fourth quarter were personal consumption expenditures (PCE), equipment and software, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

The following chart shows the growth (averaged over two quarters) in the different components of domestic demand: consumer spending, business investment spending (divided into separate series for residential housing and all other business spending), and government spending.

Although the boom in residential investment (i.e. new housing construction) seems to have tapered off toward the end of 2004, business spending on nonresidential investment goods remained quite strong. Combined with US consumers’ unwavering willingness to keep spending nearly all of their income, this kept GDP growing at a reasonably good pace through the end of 2004. For the year, real GDP growth in 2004 was 3.9%, compared to 4.4% in 2003 and 2.3% in 2002. As I’ve said before, though the economy is currently growing at a respectable rate, the fastest part of this economic recovery seems behind us. The main causes for worry, however, are the US’s enormous and growing financial imbalances.

As a side note, this revision indicates a slightly higher increase in prices in the fourth quarter of 2004 than was initially estimated. The total increase in the GDP deflator during 2004 was 2.4%, compared to 1.7% in 2003 and 1.5% in 2002.