US GDP Growth Climbed to 4.3% in Q4 2020 – but Don’t Call the Bull Just Yet

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The Bureau of Economic Analysis reported a 4.3% increase in gross domestic product in the fourth quarter of 2020. The 0.2% upward revision represents a balance of both positive (upward) and negative (downward) indicators affecting GDP.

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The BEA data shows that upward revisions were made to private inventory investments as well in state and local government spending.

Private inventory investments are inventories businesses hold for the use of their business. This can mean retail goods in warehouses, or raw materials and supplies needed to build the items the businesses produce. Economists pay attention to these statistics, as growing inventories could signal stronger future demand. But increased inventory can also mean that inventories have been depleted too much, which would indicate that their current levels are less than optimal, according to the Federal Reserve.

An increase in this indicator can signal that economists have a positive current outlook for demand. Important to note is that this statistic can be extremely volatile and fluctuate greatly as its numbers are reported.

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The BEA notes that inventory investment plays an important role in the “short run variations in GDP growth.” One of the largest contributors to this increase was an increase in retail trade, a promising indication that consumers are starting to feel more comfortable. However, retail and consumer spending in general can be fickle and dynamic. This, coupled with an expected decrease in government spending in the wake of the pandemic, gives a tempering view of the revised numbers.

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These positive revisions were offset by downward revisions to consumer spending and nonresidential fixed investment, which the BEA defines as the purchase of both nonresidential structures and equipment and software.

The downward revision in nonresidential fixed investment could be due to decreased demand for oil and a corresponding decrease in petroleum and natural gas drilling.

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The decrease in oil demand was also reflected in the downward revision to consumer spending, where “the largest contributors were recreational goods and vehicles as well as gasoline.”

The pandemic undoubtedly accounts for a large amount of downward revisions. The BEA points out that the full economic effects of COVID-19 cannot be truly quantified in GDP for the fourth quarter of 2020 because the impacts are embedded in data and cannot be identified as a separate statistic to be measured. However, the BEA notes that the increase in fourth-quarter GDP does reflect continued economic recovery from the sharper declines earlier in 2020 and indicates that closures and pandemic restrictions had more effect in some areas of the United States than in others.

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Global markets are anticipating a small return to normalcy in 2021, but it’s impossible to put a date on the upswing. The data is mixed. While there are some positive indicators for an increase in demand, an increase in exports was accompanied by an increase in imports.

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The increase in consumer spending reported by the BEA is a promising step towards economic recovery. However, many analysts claim that the stock market, which has been in an unrelenting rally since 2020, is highly speculative, and prices eventually will have to correct. Should the economy contract further and stocks remain speculatively inflated, prices could dip drastically at a time that could significantly affect recovery efforts.

While GDP rose, the economy overall shrank by 3.5% last year, the Wall Street Journal says.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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