GDP Growth Stronger than Expected in Q4 at 3.5%

The Commerce Department kept up with its vacillating readings of gross domestic product Wednesday by releasing their “advance” estimate of GDP growth for the fourth quarter of 2006 and the full year.  GDP growth in Q4 was pegged at 3.5%.

This was a good bit higher than economists’ predictions of growth around 3%.  It should be noted that the 3.5% reading is a preliminary one that will be subject to adjustment.

The biggest factors pushing growth upward were, as always, consumer spending, government spending, and — for a change — the import-export position.

Consumer spending in Q4 increased 4.4% after a 2.8% increase in Q3.  This alone contributed 3 percentage points to the GDP reading.  Government spending increased 3.7% in the quarter, led by a massive 11.9% increase in military spending.  On the trade balance, exports increased 10% while imports decreased 3.2%, leading to a 1.6 percentage-point gain for GDP, the largest in 10 years.

Housing was a major drag on the economy in the fourth quarter, cancelling out 1.2 percentage points from the GDP.

In a shocking twist on the normal readings, consumer prices dropped 0.8% in the fourth quarter, the first time that’s happened in 45 years.  But it doesn’t mean inflation is dead: the core price index, which excludes food and energy prices, was up 2.1%.  That level is still above the Fed’s comfort zone for inflation.  Declining home prices may be the cause of the overall drop in consumer prices.