New GDP Report Offers Hopeful Sign for Economy and Jobs

The economy expanded at a 3.2 percent annual rate in the fourth quarter of 2010, according to today’s preliminary report on gross domestic product (GDP) from the Commerce Department.  Final sales of goods and services — a better measure of underlying demand than GDP — grew at a blistering 7.1 percent annual rate, offering hope for job creation going forward.

The economy has grown for six straight quarters, but it needs to grow faster to restore healthy job growth after the 2007-2009 recession.  Encouraging growth in consumer spending fed the jump in final sales of goods and services.  Previously, final sales were weak and businesses were building up inventories of unsold goods; that pattern reversed in the fourth quarter as final sales surged (see chart).

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We already know that job creation in the fourth quarter was modest compared with the size of the jobs deficit that is the legacy of the 2007-2009 recession.  But if sales remain strong and goods continue moving off the shelves, businesses may finally start to hire in earnest.

Of course, continued growth in demand requires that the Fed continues its policy of supporting the economic recovery and the Congress doesn’t do anything to undermine it, like immediately slashing government spending.