GDP growth improved in the fourth quarter of 2010, with the final estimate clocking in at 3.1 percent (annual rate), even better than the 2.6 percent rate recorded in the third quarter. The final estimate was revised upward from the previous month’s estimate of 2.8 percent. Fourth-quarter …
GDP growth improved in the fourth quarter of 2010, with the final estimate clocking in at 3.1 percent (annual rate), even better than the 2.6 percent rate recorded in the third quarter. The final estimate was revised upward from the previous month’s estimate of 2.8 percent. Fourth-quarter growth was supported in large part by a 4.0 percent rise in personal consumption spending, which contributed 2.8 percentage points to GDP growth. Net exports also made a large contribution (3.3 percentage points), following three quarters of net subtractions from growth. The reversal in the foreign trade contribution is most likely a reflection of the huge 3.1 percentage point drag on GDP growth from inventory investment. After months of inventory building partly serviced by imports, wholesalers and retailers dramatically slowed the pace of restocking in the fourth quarter, curtailing import spending as a result.
Weakness in the incoming monthly data indicates a slowing of GDP growth in the first quarter of 2011; we currently expect real GDP growth in the neighborhood of 2.0 percent. Some of the slowing is likely the product of negative shocks, including severe winter weather in North America, a run-up in oil prices due to political unrest in the Middle Eastern and North African countries, and supply-chain disruptions in the wake of the Japanese disaster. We expect that lingering effects of these shocks will dampen growth somewhat in the second quarter, delaying a more pronounced rebound until the second half of the year. Labor markets continued to improve in the first quarter despite the apparent weakness in economic activity. March payrolls rose 216,000 besting the 194,000 rise in February. Private payrolls rose 230,000, almost as strong as the 240,000 February increase. Government payrolls contracted another 14,000 in March following a sharper 46,000 decline in February. These losses are concentrated in state and local governments where budgetary pressures are severe. During the first quarter, job losses in this sector averaged 28,000 per month. In the survey of households, the unemployment rate fell from 8.9 percent to 8.8 percent. Over the past four months, the unemployment rate has dropped by a full percentage point. Labor force participation remained at 64.2 percent (of the aged 16-and-over population) in March, the same as in the first two months of the year, hinting that participation is at, or near, its cyclical low.
On the inflation front, rising gasoline and food prices have steadily pushed headline CPI inflation higher. In February, it reached 2.2 percent on a year-over-year basis, compared to 1.7 percent in January and 1.4 percent in December. We look for a further increase in March, which will take year-over-year CPI inflation above 2.5 percent. A combination of higher inflation expectations (to levels more consistent with the price stability mandate of the Federal Reserve) and some pass-through of higher energy and commodity prices to final output prices have halted the deflationary trend of 2010 and put underlying inflation (which excludes food and energy prices) on an upward trajectory. Core CPI inflation (which excludes food and energy prices) came in at 1.1 percent (year-over-year) in February, up from a cyclical low of 0.7 percent in December to 1.1 percent in February. Core personal consumption expenditures (PCE) inflation inched up from 0.7 percent to 0.9 percent over the same time period, well below the 1.7–2.0 percent long-term range favored by the Federal Open Market Committee. [2011-04-11]