Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.5 percent in the fourth quarter of 2006, according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, realDespite the worries of some (such as myself), 2006 turned out to be a pretty good year for economic growth. Not great, but certainly solid. The housing sector did indeed contract sharply in 2006, but that was more than made up for by spending by consumers, non-residential business spending, and especially by export growth (more about that in an upcoming post). The following picture illustrates.
GDP increased 2.0 percent.
...The acceleration in real GDP growth in the fourth quarter primarily reflected a downturn in imports and accelerations in PCE for nondurable goods, in exports, in federal government spending, and in state and local government spending that were partly offset by downturns in private inventory investment and in equipment and software and a deceleration in nonresidential structures.
One may still have reason to worry about the housing sector contracting further in 2007, however. As the next picture shows, the shrinkage of residential construction in 2006 was severe, but still has some room to shrink further, particularly given its heady expansion during the years 2002-05. On the other hand, non-residential business spending remained solid in 2006 -- not outstanding, but solid.
Today's data also seems to confirm that inflation moderated toward the end of 2006. Overall prices that consumers paid for their purchases fell dramatically in the fourth quarter, due primarily to lower gas prices. But even inflation in non-energy items seems to have peaked.
Despite what the Fed will say later today, the US economy seems to be quite firmly on a trajectory toward moderating inflation. Overall, the US economy seems to have done quite well in 2006. But I remain convinced that if there are any looming clouds on the horizon for 2007, they remain of the slowing-growth variety, rather than the higher-inflation sort.