Healthy Surprises in the 4th Quarter GDP Report

The U.S. economy finally seems to be recovering. In the fourth quarter, consumers reopened their wallets and manufacturers slashed inventories, indicating they're getting ready to ramp up production of more goods this year.

The GDP figures released by the government Friday for the last quarter contained a number of surprises: Consumer spending was up a strong 4.4% on annualized basis, and final sales -- that's GDP without inventories -- surged ahead 7.1%, its largest jump in nearly 30 years.

"The pace of consumption is phenomenal, but no one should expect this to be maintained," says Tom Porcelli, chief economist for RBC Capital Markets in New York. He says spending is likely to average 3% for the year because job growth remains relatively modest. But Porcelli says the report was especially encouraging because it showed growth across the board, with a boom in auto sales contributing 0.9% to GDP, and nondurable consumer goods adding 0.8%.

Trade was also a big contributor to the economic gains, with exports surging 8.5% and imports declining 13.6%.

"Our exports continue to move long at a fairly robust pace, thanks to economic activity taking place outside our borders," Porcelli says. "That's providing a nice boost to our economy."

Restocking of Lean Inventories Is Likely

Inventories showed one of the most striking changes: They had ballooned by $121 billion in the third quarter, but only rose by $7 billion in the final three months of the year.

"That should leave businesses in a position of lean stocks again heading into the new year, so that production is likely to ramp up, both to fulfill firming demand and replenish depleted warehouses and shelves," says Stephen Stanley, chief economist at Pierpont Securities in Westport, Conn. In his opinion, the low inventory numbers are likely to create a flurry of upward revisions in GDP estimates for the first quarter.

The current consensus average among economists places first-quarter 2011 GDP growth at 3.25%. Stanley thinks the actual growth number will be more like 3.5% to 4%. "I expect business investment in equipment and software to surge in the first quarter a pent-up capital outlays are unleashed," he adds.

While 2011 isn't going to be a "blowout" for the economy, according to Porcelli, growth should be healthy throughout the year. And if consumers can keep spending at the fourth quarter's pace, it may even surprise to the upside.

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