GDP Shows Further Acceleration, but Storm Clouds Still Linger

The Commerce Department revises latest GDP measure upward, but growth could recede this quarter.

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Today the Department of Commerce announced that GDP in the fourth quarter of 2011 grew at a 3 percent annual rate—0.2 percentage points higher than previously estimated. The upward revision is a welcome sign of a more robust recovery, but it doesn't point to accelerating growth through 2012.

Firms rebuilding their inventories was a key driver of fourth-quarter growth, adding nearly 1.9 percentage points to fourth-quarter GDP growth, as private firms increased inventories by $54.3 billion—up from a $2 billion decrease in the previous quarter. That accumulation of inventories boosted the economy, but it could mean that businesses will pull back throughout early 2012.

[Why We Should Still Be Worried about a Double-Dip Recession.]

"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," writes Nigel Gault, chief U.S. economist at IHS Global Insight, in a commentary on the numbers.

The data also suggests that continued government fiscal restraint will be a drag on the economy. The Commerce Department's release notes that improvements such as increased consumer spending were offset in part by decreases in spending by federal, state, and local governments. Reductions in government spending subtracted nearly 0.9 percentage points from fourth-quarter growth.

Given global uncertainty and a recovery that remains fragile, says Scott Hoyt, senior director of consumer economics at Moody's Analytics, it's not time to declare the economy healed just yet.

"It is clearly premature to conclude that the economy is off and running," he said in a report about today's revision, noting that rising commodity prices and the Japanese earthquake derailed economic improvements in early 2011.

[2012 Job Gains: This Time, It's Different.]

"It would not take much to repeat the pattern this year, since business and consumer sentiment remains brittle from the effects of the Great Recession and events in Washington," he adds.

Still, the upward revision was also driven by several other positive developments: personal consumption spending accelerated in the fourth quarter, growing by 2.1 percent, up from the third quarter's 1.7 percent, and exports also grew by 4.3 percent, slightly slower than in the previous quarter.

In addition, growth in disposable income has been revised upward, from 0.8 percent to 1.4 percent. Gault believes that income growth is the biggest news from the Commerce Department's release, because it came as Americans saved more than previously thought, with the savings rate revised from 3.7 percent to 4.5 percent. This means that Americans were earning and spending more without compromising their financial security.

"Household incomes have been doing better than we thought, giving consumers a bigger cushion to cope with the headwind from rising gasoline prices," writes Gault.

While there are no guarantees for the future, stronger economic growth is still a positive sign.

"This does not mean for certain that the economy will continue to grow, but at least the recovery is evident," says Brian Hamilton, CEO of financial information company Sageworks.