Real gross domestic product expanded 3.2% at an annual rate in the fourth quarter, boosted by the strongest consumer spending growth in more than four years as consumption expenditures dropped to a record low, the Commerce Department reported Friday.
Consumer spending, which accounts for about 70% of GDP, increased 4.4% in the fourth quarter ending Dec. 31, the largest increase since the first quarter of 2006. Consumption of durable goods increased 21.6%, the largest gain in nine years.
However, inflation dropped to a new record low. Personal consumption expenditures excluding food and energy goods, the Federal Reserve’s preferred measure of inflation, increased 0.4%, the smallest increase on records dating back to 1959. Core PCE increased 0.5% in the third quarter. The inflation gauge increased 2.8% in the fourth quarter of 2007, just as the economic recession was beginning.
Following its monetary policy meeting earlier this week, the Federal Open Market Committee said that energy prices increased in late 2010, but that core prices continued to trend downward. The Fed affirmed its commitment to purchase $600 billion of Treasuries through June.
Economists expected GDP to increase 3.6% for the quarter, according to the median estimate from Thomson Reuters. The third quarter GDP expanded 2.6%.
For all of 2010, GDP expanded 2.9%, the largest annual gain since 2005 when GDP grew 3.1%. GDP contracted 2.6% in 2009.
The fourth quarter GDP increased to $13,382.6 billion, a record high for GDP in chain-weighted dollars, surpassing the $13,363.4 billion level recorded in the fourth quarter of 2007.
In the fourth quarter, businesses slashed inventories. The change in private inventories subtracted 3.70 percentage points from overall GDP growth.
Inventory investment was one of the first sectors of the economy to rebound amid the recession. Gross private domestic investment had increased by double-digits for five straight quarters through September 2010.
Investment in equipment and software products increased 0.8%, the first quarterly increase since the second quarter of 2008.
The trade deficit fell to $492.2 billion, the lowest level since the first quarter of 2010. Exports increased by 8.5% for the quarter and imports fell by 13.6%. Trade added 3.44 percentage points to GDP, the largest contribution since the second quarter of 1980. Trade subtracted 1.70 percentage points in the third quarter of 2010.
Government spending also subtracted from GDP growth. Federal government spending slipped 0.2% and spending by state and local governments declined 0.9%.
The American Recovery and Reinvestment Act of 2009 raised disposable personal income by about $180 billion in the fourth quarter, Commerce reported. The federal stimulus law funded about $94 billion in current grants to state and local governments.
