Gross domestic product rose at a 3.2% annualized pace in the 4th quarter. That was lower than expectations of a 3.5% increase, but better than the 2.6% rate we saw in the 3rd quarter.

Gains were led by a 4.4% increase in personal consumption, close to double the rate in the 3rd quarter. Also the trade balance and even non-residential fixed investment (up 4.4% compared to a fall of 10.0% in 3Q as well) added to growth.

The economy less inventories surged a whopping 7.1%, the best since 1984. That means we saw a massive swing in inventories which subtracted from growth.

In other words despite the headline figure missing forecasts, it was a very good miss and shows that the US economy is starting to be propelled by more sustainable activity.

Consumer Spending Powers Growth During the Quarter

The gains were fueled mainly by an increase in personal consumption as US consumers were more willing to spend. There was some pent-up demand as confidence had been shaky in the 2nd and 3rd quarter, but the end of the year brought a bump in confidence and data on consumption has been strong of late.

Consumer spending, which accounts for 70% of the economy, was projected to increase at a 4% annual pace, but rose a bigger 4.4%. That's the fastest pace since the start of 2006.

Here's a look at retail sales and we can see the strong gains during the 4th quarter.


Personal Spending, another measure of consumption and the one that is actually used in GDP calculations has also been much stronger to end the year.


This indicator is one month behind the retail sales report so we wait to get December's data on Monday (1/31). Personal spending is expected to increase 0.6% in December, after a 0.4% in November.

Stronger consumer spending puts the recovery on firmer footing, but with a high unemployment rate can US households sustain this economic activity?

4th Quarter Shows Trade Surplus, Adds to Growth

Trade data has been supportive of late as well, as October's (-$38.4B) and November's (-$38.3B) trade deficits were both smaller than expected, and the lowest since the early part of the year.

Here's a look:


For the first time in 2010, the economy also benefited from a trade surplus in October to December. Net exports, or exports from the U.S. minus imports into the country, contributed 3.44 percentage points to growth. In July through September, the trade gap subtracted 1.7 percentage points from GDP.

Increasing exports has been a major theme of the Obama administration, so perhaps we can expect to see a lower trade deficit showing up in the data, and helping US growth.

Will this Pace of Growth Dent Unemployment?

The reaction in markets were pretty minimal, with the USD strengthening a bit in the 25 minutes after the release.

Many observers have predicted that GDP growth will run about 4 percent in 2011. If that forecast panned out, it would begin making a substantial dent in the vast rolls of the unemployed Americans, now officially at 14.5 million. Many more millions have given up looking for work, dropped out of the labor force entirely or been forced to take part-time jobs even though they need full-time work.

Even so, we have seen an increase in consumer spending, but what if it falls off? A growth rate of 3.1% in 2011, which is the prediction of the Congressional Budget Office would only bring down unemployment slowly, perhaps leaving rates above 9% by the end of the year.

Therefore, until we see added growth knocking down unemployment rolls the Fed will be staying pat.