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Consumption and Trade Spur 4th Quarter Growth

January 31, 2007

By Dean Baker

Savings were negative for the second consecutive year.

The economy grew at a surprisingly strong 3.5 percent annual rate in the 4th quarter, driven primarily by strong consumption growth and an improvement in the trade balance. This growth is especially impressive given that residential investment continued its sharp decline and non-residential investment also fell in the quarter.

Consumption grew at 4.4 percent annual rate in the quarter, contributing 3.05 percentage points to GDP growth. Both durable and non-durable goods consumption had strong quarters, growing at 6.0 percent and 6.9 percent annual rates, respectively. The durable goods performance was especially striking because car sales actually declined modestly. The category of furniture and household equipment (which includes electronics) grew at an extraordinary 15.3 percent annual rate. The 6.9 percent growth rate for non-durable goods was the strongest since the third quarter of 2003. It is likely that unusually good December weather contributed to this growth, which was higher than most analysts had expected.

The improving trade balance added 1.64 percentage points to growth, the first positive contribution of the trade sector since the 3rd quarter of 2003. Exports grew at a healthy, but unexceptional 10.0 percent annual rate. The main reason for the improvement in the trade balance was a 3.2 percent drop in imports, the first decline since the 1st quarter of 2003.

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