U.S. Economic Growth: Crisis Averted?

According to the U.S. Bureau of Economic Analysis, the U.S. economy grew at an annual rate of 3.2% in the last three months of 2010. Analysts had eyed the advance GDP report to print a 3.5% uptick but it seems like economic gurus were happy enough with the actual figure.

Why, you ask?

First, the increase in economic activity during the quarter was enough to bring the U.S.’s real GDP back to pre-crisis levels. In fact, it is 2.5% higher than the previous high in 2007!

To put the cherry on top, there was the huge upward revision in the Q3 GDP. It was initially reported that the economy only grew by 2.0% in the third quarter of 2010. On Friday, it was announced that it actually expanded by 2.6%.

Now who’s in for a little more digging to find out which sectors get a gold star for driving growth and which ones still need a boost? Come on, this could be crucial in determining where the Greenback is headed, so I better see all those hands up in the air!

Breaking down the components of the recent GDP figure, we see that consumer spending, which accounts for more than two-thirds of U.S. growth, was at the top of its game last quarter. Americans pumped up their spending by 4.4% then, chalking up its largest contribution to economic growth in the last four years.

This shouldn’t be too surprising, as spending usually picks up during the last quarter of the year, thanks to all the celebrations and holidays during that time. I’m talking about purchases of candies and costumes for Halloween, grocery shopping for a Thanksgiving feast, and a whole lot of gift-buying for Christmas! ‘Tis the season to be shopping!

If the surge in spending could be mostly attributed to seasonal factors, does it mean that spending could die down in the coming months? Does it follow that economic growth is likely to slow down too? Those are just a couple of questions to think about before saying that the U.S. economy has brought sexy back for good.

Another factor that boosted growth for the quarter was the jump in exports. However, economic gurus are also doubtful whether the improvement in trade could be sustained. Businesses will most probably replenish their stockpiles later on and this could lead to a pick-up in imports, which would be negative for the GDP.

On the other hand, since inventories reportedly shrank in the previous quarter, companies would need to step on the gas in terms of their production in the upcoming months in order to meet rising demand. That sounds promising, doesn’t it? But does that guarantee that the U.S. economy would be completely out of the woods when it comes to another recession?

Recall that just last week, we got news that the U.K. is staring at the possibility of a double-dip recession. I’m sure there are Yanks out there who are wondering if the same can be true for the U.S. economy.

On the surface, yes, the economy did grow at levels comparable to before the Great Recession. But a look at history shows us that this recovery took unusually longer than those of the past. In the early 1970s, the economy normally took two years to recoup all output losses. This recession took up three years.

The recent recovery also makes a weak comparison to the more recent recoveries following the recessions of 1990 and 2001. In both those scenarios, quarterly growth had showed quicker, more consistent quarterly growth figures.

Furthermore, keep in mind that there are still some risks that could keep the economy from busting out of its slump. More specifically, the current state of the labor market. Unemployment remains high, while companies are still hesitant to raise wages. No matter how you slice it, if people are collecting paychecks, then spending will remain capped.

But before we get ahead of ourselves, we still have to wait and see whether the actual employment and spending figures post improvements in the future. If you want to stay up to date with these reports and our analysis of the data, add us on Facebook or follow us on Twitter. I’ll keep y’all posted!