Modest Economic Growth, Here We Come

The U.S. economy is destined for a modest year of growth, according to economic experts and Federal Reserve Chairman Ben Bernanke.

The assessment follows two market-moving events today: A Commerce Department report revising fourth-quarter GDP growth and a House Committee on Financial Services hearing featuring a testimony by the Fed chief.

The Commerce report, which showed that the economy grew at a 3 percent rate at the end of 2011 rather than 2.8 percent, was the genuine surprise today. Analysts polled by Bloomberg earlier in the month weren't expecting an increase, and in many cases, foreshadowed a downward revision. A string of positive economic developments drove the re-write, including an acceleration in personal consumption spending (up 2.1 percent), exports (up 4.3 percent), and manufacturing. Additionally, growth in disposable income was revised upward to 1.4 percent from 0.8 percent.

Taken together, the indicators have caused analysts to "tamper expectations of a sharp pullback in growth this quarter," reports Reuters. The reason we're not seeing expectations of strong growth, however, is because of other signs of lagging, such as real final sales of domestic product, the GDP minus inventory addtions, which increases a mere 1.1 percent in the fourth quarter as opposed to a 3.2 percent increase in the previous quarter. "Growth is still on the right path, but we are not going to see any acceleration. Income was revised up so it removed one of the headwinds to growth in the beginning of the year," Yelena Shulyatyeva, an economist at BNP Paribas, tells Reuters.

Speaking with U.S. News and World Report, Nigel Gault, chief U.S. economist at IHS Global Insight, says, "We still think that growth will slow to around 2 percent in Q1, with final sales doing much better but inventories no longer adding to growth."

As for Bernanke, his prediction of modest growth was based on a number of factors, including the possibility of higher oil prices that were “likely to push up inflation temporarily while reducing consumers’ purchasing power." Beyond that, he cited the typical economic villains that have been plaguing the post-crash recession, including "the depressed condition of the housing market and continued economic turbulence in Europe." Bernanke is also reluctant to forecast strong growth, notes The New York Times, because the Fed has "overestimated the pace of recovery several times in recent years."

“The recovery of the U.S. economy continues, but the pace of expansion has been uneven and modest by historical standards,” Bernanke said. As a result, he pledged that the central bank would continue its economic stimulus efforts such as keeping short-term interest rates near zero and lowering borrowing costs.