U.S. GDP Grew By 5.7% In The 4th Quarter

The U.S. Department of Commerce released its preliminary 4th Quarter GDP calculation today. It looks pretty good. GDP grew by a whopping 5.7% annualized pace during the quarter, the fastest growth the U.S. has seen since 2003. That's the second quarter of positive income growth, and significantly better than the 3rd quarter's 2.2% growth. Let's dig into the report.

First, a disclaimer: 4th quarter GDP may not have been 5.7%. In fact, it's very likely it wasn't. This is just the first estimate, and there are two more revisions to come before the number is final. You may recall that 3rd quarter GDP started at 3.5% in its first estimate, only to be revised downward twice, to eventually settle at a much more mild 2.2% rate.

So let's look at what makes up the 4th quarter's growth. As it turns out, personal consumption actually did worse in the 4th quarter than the prior. It made up 1.4%, versus 2.0% in the 3rd quarter. Within that, goods did worse than services, adding 0.6% and 0.8% growth, respectively. As for those goods, Auto sales actually brought down the quarter's GDP by 0.6%, compared to adding 1.45% in the 3rd quarter.

Gross private domestic investment played a huge role, accounting for 3.8% of the growth. That compares to a measly 0.5% rate in the 3rd quarter. The largest component comes from the change in real private inventories. It made up 3.4% of the 5.7% growth. That's a vastly larger contribution than in the third quarter, when this component made up just 0.7%. Businesses didn't liquidate their inventories as much in the 4th quarter as in the 3rd. This means that final sales made up the other approximately 2.2% of the 5.7% growth.

Another thing to note about the investment contribution: it had more to do with nonresidential than residential fixed investment. Business investment added 0.3%, up from a decline of 0.2% in Q3. Meanwhile residential investment accounted for only 0.1% -- that's down from a 0.4% contribution in the 3rd quarter.

Net exports were positive, accounting for 0.5% of the quarter's GDP. This is also better than Q3, when they resulted in a 0.8% decline.

So this is good news, but, again, we don't know what the final number will actually be. I would also suggest holding off on popping the champagne to celebrate a robust U.S. economy. Most economists predicted a healthy rate of GDP in Q4-2009, but expect that to decline from there to more moderate levels through 2010. And unemployment is also expected to hover near double-digits throughout the year.