The advance report on fourth-quarter gross domestic was even more underwhelming than the headline 2.8% annualized growth rate reported Friday morning. Stripped of the effects of inventory building, the U.S. economy grew at less than a 1% annual rate in the latest quarter.
Real final sales (GDP less inventory changes) expanded at an anemic 0.8% annual pace in the fourth quarter, a sharp slowdown from the third quarter’s healthy 3.2% rate. That paints a different picture from the apparent pick-up in headline GDP growth from the third-quarter’s 1.8% yearly rate. The difference reflects the shift to inventory building in the fourth quarter from a drawdown in the third quarter.
Also helping real GDP to look better in the latest quarter was an extraordinarily low GDP deflator of just 0.4%, down from 2.6% in the third quarter, which mainly represented falls in import and export prices. A lower inflation adjustment translates to better real growth. Before inflation adjustment, nominal GDP grew at just a 3.2% annual rate in the fourth quarter and was up only 3.7% from the fourth quarter of 2010.
The Federal Reserve’s favored inflation measure, the core personal consumption expenditures deflator, slowed to a 1.1% annual rate in the fourth quarter from 2.1% in the previous quarter. On a year-over-year basis, the core PCE was up 1.7%, under the Fed’s implied 2% inflation target. That helps explains the confidence on the part of the central bank to hold its fed-funds target near zero all the way through 2014.
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