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In Depth: Economic Growth Numbers for Q4 2010

Chicago Daily Observer 31 January 2011 No Comment

In response to our observation that Gross Private Domestic Investment actually declined 5.8% in Q4 of 2010, we asked our contributor Brian Wesbury for a further explanation of the drop.

This nominal drop is highly misleading. Gross Private Domestic Investment (GPDI) includes 4 major components.

1) Residential Investment (mainly housing), which was up 5.3% at an annual rate.

2) Non-residential structures (plant, warehouses, office buildings, etc.), which was up 4.1%.

3) Non-residential equipment and software (business investment), which was up 5.6%. And

4) Inventories, which were down $114.2 billion in Q4.

In other words, the entire decline in GDPI was due to a drop in inventories as US consumers bought more stuff than the US produced or imported in the quarter. All the other components of investment increased. All the numbers above are nominal because that is what this post used.

In Q4, final sales rose 7.1% at an annual rate (after taking out inflation) – the strongest gain since 1984. Inventories were down and that’s actually a sign of consumer strength.

concurring with the St. Louis Federal Reserve

A note of clarification on GPDI: Gross Private Domestic Investment (GPDI) is comprised of two components: change in private inventories (CBI) and fixed private investment (FPI).

The decline in GPDI in Q4 2010 is related to the change in private inventories. The other GPDI component, fixed private investments (FPI), increased during the same period.

Here’s a chart comparing FPI and GPDI over time.

One line summary…US Consumers bought everything that was on the shelf in Q4 2010, depleting inventories.

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