The government released its first estimate of GDP for the fourth quarter of 2013 this morning, showing 3.2% growth for the quarter and 2.7% compared to the fourth quarter of 2012. The details were generally good, but some don't look sustainable. Good news included consumer spending rising by 3.3%, it's fastest rate since the end of 2010. On the flip side, residential investment fell at nearly a 10% rate, it's first decline since the summer of 2010. Though residential construction may not grow as quickly in the coming year (compared to the double-digit growth seen in recent years, this was probably an aberration due to weather). Business investment grew by just under 4%, somewhat slower than the middle of the year due to a decline in business construction). The private domestic economy (consumers and businesses) grew by 2.4% in the fourth quarter compared to 2.25% in the third and 2.2% in the second (i.e., growth has been relatively stable, but increasing slightly).
Exports added 1.5% to economic growth, the second strongest contribution since the end of the recession. Given the state of the global economy, this is unlikely to be repeated (exports may do fine, but are unlikely to grow as rapidly as at the end of 2013). Federal government purchases fell by 12.6% due to both cuts in defense spending as well as nondefense spending (as a result of the government shutdown). Given the recent passage of the budget covering the next couple of years, this is unlikely to be repeated. After adding about 1.7% to economic growth in the third quarter, inventories added 0.4% to growth in the fourth quarter. Though inventories have added to economic growth throughout 2013, that's unlikely to be repeated in 2014.
What does this report tell us about the economy? First, you'll note that the analysis keeps using the phrase. "this is unlikely to be repeated." Exports and inventories are unlikely to add as much to economic growth in 2014 while residential investment and government purchases are unlikely to subtract as much from growth as they did at the end of 2013. So what's the likely direction of economic growth? Though some consumers still face headwinds (student loan debt, modest growth in incomes, ...), it appears that much of the deleveraging as a result of the financial crisis is over. As such, consumer spending will pick up compared to recent years. Combine this with moderate growth in business investment and you get economic growth approaching 3% in 2014. If the US does grow by 3%, it'll be the fastest pace of economic growth since 2005.
