Fisher Investments Editorial Staff
US Economy

Recovery Ends. Expansion Begins.

By, 01/31/2011

 

Story Highlights:

  • The first estimate of US GDP was released Friday, missing estimates but showing accelerating growth.
  • The report also had pockets of strength beneath the surface—and pushed US real GDP to a new high.
  • GDP reports are a snapshot of economic history, holding lessons for investors.

 

The US Bureau of Economic Analysis (BEA) released its first estimate of Q4 2010 GDP on Friday. The report showed accelerating growth—to 3.2% annualized real GDP growth in Q4, missing analysts' expectations of 3.5%. While some met the report with disappointment, there are also many strong points.

Of note and little mentioned, US real GDP eclipsed its pre-recession peak for the first time (nominal GDP already accomplished that feat), meaning the economic recovery is now over and expansion has officially begun. And headline GDP isn't the only metric that's expanding—personal spending and exports are both above prior highs.

The acceleration from Q3 2010's 2.6% growth was largely driven by two contributors: Consumer spending and net exports. Consumer spending posted its largest quarterly increase (+4.4%) in four years, and net exports, a metric reducing GDP in Q2 and Q3 2010, reversed course and added to headline growth.

We've often said GDP statistics aren't a perfect reflection of economic health, which is illustrated well by net exports and  also other components. For example, the biggest overall detractor from US growth was private inventory draw downs. But at the same time, companies shedding inventory at this stage in a growth cycle can imply potential inventory build in future quarters—a plus, as this source of demand could help drive future growth. Also detracting from growth was total government spending, which dipped by -0.6%. We can quibble over the future value of government spending, but if a decrease in government spending is offset by private sector spending, we consider that a win-win-win (with a few more wins thrown in).

But even after today's preliminary report showing acceleration and expansion, critics remain. Some opine the acceleration is still not quick enough to reduce unemployment. Maybe. But what level of GDP growth is sufficient to cause unemployment to evaporate? We're not aware there was one.

So if GDP reports aren't a perfect window into economic health, what are they good for? Well, for one, GDP reports can be used as an instructive sliver of economic history. Consider the following example: In early 2009, headlines far and wide warned of looming depression, a new era of lackluster or zero growth, or worse. (Even politicians from both parties used words like "meltdown" to describe our economic future at the time.) Back then, that the economy would recoup the recession's GDP declines (plus a bit) by 2010's close seemed a ridiculous notion to many. (We also strongly doubt many would have been disappointed by 3.2% growth at the time.) Perhaps the gap between what investors commonly perceived then (it's different this time) and what happened (a sharp recession taking just 18 months to recover from) is the best lesson to draw from today's report. After all, while recession negatively impacted many, those who fell prey to fear and exited stocks near their deepest point were hurt far worse—selling at a dark time, only to miss the dawn.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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