US economy gathers speed

The US economy gathered speed in the fourth quarter, though a touch below expectations, with the biggest gain in consumer spending in more than four years and strong exports offering the clearest signals yet that a sustainable recovery is under way.

Even with growth quickening, however, progress reducing unemployment has been painfully slow, and the report on US gross domestic product on Friday is little comfort for millions of unemployed Americans or the Federal Reserve officials on a jobs-creation vigil.

The economy grew at a solid 3.2 per cent annual rate in the final three months of 2010, the Commerce Department said, after expanding at a 2.6 per cent pace in the third quarter. The rise was a touch below economists' expectations for a 3.5 per cent rate.

For the whole of 2010, the economy grew 2.9 per cent, the biggest gain since 2005. The economy contracted 2.6 per cent in 2009.

"Unfortunately we still need to see much stronger growth to begin to really make a dent in the unemployment rate. Right now we are just barely creating enough jobs to stabilise the unemployment rate," said Ryan Sweet, a senior economist at Moody's Analytics, before the data was released.

On Wednesday, Fed officials voiced concern the pace of the recovery was still not strong enough to significantly lower unemployment and reiterated a commitment to a $600 billion stimulus effort through the purchase of government bonds.

The jobless rate has been stuck above 9 per cent since May 2009. With the economy's growth potential between 2.5 per cent and 2.7 per cent, analysts say an expansion rate of at least 3 per cent over several quarters is needed to cope with new entrants in the labour market and the unemployed.

The unemployment rate fell to 9.4 per cent in December from 9.8 per cent in November.

Details of the GDP report showed the economy moving in the right direction. Consumer spending, which accounts for more than two-thirds of US economic activity, grew at a 4.4 per cent rate - the fastest pace since the first quarter of 2006.

"The handoff from temporary factors to domestic demand is under way. This is what we need for the recovery to be self-sustaining," said Harm Bandholz, chief US economist at UniCredit Research in New York.

Consumer spending added 3.04 percentage points to fourth-quarter GDP growth, also the largest contribution in more than four years.

Support to growth during the fourth quarter also came from a pick-up in exports, which resulted in a narrower trade deficit. Trade added 3.44 percentage points to GDP growth, the first contribution in a year.

That offset the drag from business inventories, which increased a mere $7.2 billion after a $121.4 billion rise in the third quarter. Inventories, which had been the main driver of growth since the start of the recovery in the second half of 2009, subtracted from GDP growth for the first time since the second quarter of 2009.

Excluding inventories, the economy grew at a 7.1 per cent rate after rising at a 0.9 per cent pace in the third quarter.

Business spending on equipment and software notched its seventh straight quarter of growth, though the pace slowed to 5.8 per cent from 15.4 per cent in the prior quarter.

Although businesses have been hesitant to hire, they have used their vast cash reserves to buy new equipment and upgrade their technology.

Investment in home building and nonresidential structures were surprise additions to growth in the fourth quarter. Home construction grew at a 3.4 per cent pace, while structures expanded at a 0.8 per cent - the first growth since the second quarter of 2008.

Government spending contracted, with much of the drag coming from state and local governments.

The advance GDP report also showed a rise in the personal consumption expenditures price index, reflecting the recent surge in food and gasoline prices. The overall PCE price index rose at a 1.8 per cent rate after increasing at a 0.8 per cent pace in the third quarter.

But the core PCE price index, which excludes food and energy costs, advanced at a record low 0.4 per cent pace after rising at a 0.5 per cent rate in the previous quarter, highlighting the Fed's concerns about low underlying inflation.

Reuters