The Advance Estimate of 4th Quarter GDP from the Bureau of Economic Analysis estimated that the real output of goods and services produced in the US grew at a 2.9% annual rate from the output of the 3rd quarter, when our real output grew at a 3.2% real rate, as growth in inventories, personal services, government, and a decrease in imports (a positive for GDP) accounted for the quarter's growth, more than offsetting a big drop in residential investment.  For the entire year, our economy grew at a 2.1% rate, quite a bit slower than the 5.9% growth rate of 2021, when the economy was rebounding from the pandemic induced 2.8% contraction of 2020.   In current dollars, our fourth quarter GDP grew at a 6.51% annual rate, increasing from what would work out to be a $25,723.9 billion a year rate in the 3rd quarter to a $26,132.5 annual rate in the 4th quarter, with the headline 2.9% annualized rate of increase in real output arrived at after annualized inflation adjustments averaging 3.5%, aka the GDP deflator, were computed from the price changes of the GDP components and applied to their current dollar change...

As is usual with an advance estimate, the BEA cautions that the source data for GDP is incomplete and also subject to revisions, which have averaged +/-0.6% in either direction before the third estimate for the quarter is released, which will be two months from now..  Also note that December's construction, trade in services, and non-durables factory inventory data have yet to be reported or formally estimated, and that the BEA assumed a $12.5 billion increase in exports of services, a $1.8 billion increase in imports of services, a $7.4 billion decrease in residential construction, a $3.2 billion increase in non-residential construction, a $1.2 billion increase in public construction, and a $0.2 billion decrease in nondurable manufacturing inventories for December before they estimated the 4th quarter’s output (see the Key source data and assumptions (xls) for more details).

While we review the details for the 4th quarter below, remember that the news release for the Advance Estimate reports all quarter over quarter percentage changes at an annual rate, which means that they're expressed as a change a bit over 4 times of that what actually occurred over the 3 month period, and that the prefix "real" is used to indicate that each change has been adjusted for inflation using price indexes chained from 2012 prices, and then that all percentage changes in this report are calculated from those '2012 dollar' figures, which would be better thought of as a quantity indexes than as any actual dollar amounts, since real GDP is not a monetary metric.   For our purposes, all the data that we'll use in reporting the changes here comes directly from the pdf for the advance estimate of 4th quarter GDP, which we find linked on the BEA GDP landing page, which also offers links to just the tables on Excel and other technical notes.  Specifically, we refer to table 1, which shows the real percentage change in each of the GDP components annually and quarterly since the 1st quarter of 2019, table 2, which shows the contribution of each of the components to the GDP growth figures for those quarters and years, table 3, which shows both the current dollar value and the inflation adjusted value in 2012 dollars of each of those components, and table 4, which shows the change in the price indexes for each of the GDP components....

Our personal consumption expenditures (PCE), which are used in the computation of more than 70% of GDP, grew at a 5.32% rate in current dollars in the 4th quarter, which were then deflated to indicate a 2.1% real growth rate of goods and services consumed, after an annualized PCE price index increase averaging 3.2% was computed to adjust that consumer spending for inflation..  Consumers outlays for durable goods fell at a 2.6% rate in current dollars, but prices for those durable goods averaged 3.1% lower, and thus the BEA found that the real output of consumer durables grew at a 0.5% rate, as real growth at an 7.4% rate in consumption of automobiles and parts accounted for 60% of the durable goods growth and offset decreases in recreational goods and other durable goods..  The BEA also found that real output of consumer non-durable goods grew at a 1.5% rate, after increased consumer spending for non-durables at a 1.0% rate was adjusted for weighted non-durable goods prices that fell at a 0.5% rate, as real consumption of gasoline grew at a 2.6% rate and led a broad based growth of all categories of non-durable goods. Meanwhile, the 8.3% nominal growth rate of consumer outlays for services was deflated by an average 5.6% increase in prices for personal services to show that the real output of consumer services grew at a 2.6% annual rate, as a 3.7% real growth rate for health care services accounted for almost 40% of the 4th quarter's growth in services. As a result of those changes in growth from the 3rd to the 4th quarter, the increase in our output of durable goods indicated by our spending on them added 0.04 percentage points to the GDP growth rate, the increase in the output of non-durable goods added 0.22 percentage points to GDP, and increased personal services added 1.16 percentage points to the growth rate of the economy in the 4th quarter..

The change in the other components of the change in GDP is computed by the BEA in the same manner that we have just illustrated for computing real PCE; ie, the annualized increase (or decrease) in current dollar spending for the quarter is adjusted with the annualized inflation factor for that component, yielding the change in real units of goods or services produced during the quarter, at an annual rate..  Thus, real gross private domestic investment, which had shrunk at a real 9.4% annual rate in the 3rd quarter, grew at a real 1.4% annual rate from those lower levels in the 4th quarter, even as the real growth rate of fixed investments shrunk at a 6.7% annual rate in the 4th quarter, after shrinking at a 3.5% rate in the 3rd quarter, as growth in inventories provided all of the 4th quarter's investment boost.  Among fixed investments, real non-residential fixed investment grew at a 0.7% rate as real investment in non-residential structures grew at 0.4% rate and added 0.01 percentage point to 4th quarter GDP, real investment in equipment shrunk at a 3.7% rate and subtracted 0.20 percentage points from 4th quarter GDP, and real investment in intellectual property grew at 5.3% rate and added 0.28 percentage points to GDP. However, real residential investment shrunk at a 26.7% rate and subtracted 1.29 percentage points from 4th quarter GDP, and turned the fixed investment component of GDP negative.  For an easy to read table as to what's included in each of those GDP investment categories, see the NIPA Handbook, Chapter 6, page 3.....

Meanwhile, real private inventories grew at an inflation adjusted $129.9 billion rate over the 4th quarter, after growing at an inflation adjusted $38.7 billion rate in the 3rd quarter, and as a result the $91.2 billion positive change in real inventory growth added 1.46 percentage points to the 4th quarter's growth rate, after a $71.5 billion negative change in real inventory growth in the 3rd quarter had subtracted 1.19 percentage points from that quarter's GDP.  However, since growth in inventories indicates that more of the goods produced during the quarter were left in storage or sitting on a shelf, the $91.2 billion increase in their growth in turn means real final sales of GDP were smaller by that amount, and hence real final sales of GDP only grew at a 1.4% rate in the 4th quarter, down from the real final sales growth rate of 4.5% in the 3rd quarter, when lower inventory growth was a major drag on the quarter's GDP growth...

Real exports and real imports both decreased in the 4th quarter, but our imports fell by quite a bit more, thus indicating greater domestic sourcing of goods and services than in the prior quarter, and hence boosting 4th quarter GDP.  Our real exports of goods and services shrunk at a 1.3% rate in the fourth quarter, after our exports had increased at a 14.6% rate in the 3rd quarter, while our real imports, which are half again greater than exports, shrunk at a 4.6% rate in the fourth quarter, after shrinking at a 7.3% rate in the 3rd quarter.  As you'll recall, increases in our exports are added to GDP because they are part of our production that was not consumed or added to investment in our country (& hence not counted elsewhere in this GDP calculation), so that decrease in 4th quarter exports conversely subtracted 0.15 percentage points from 4th quarter GDP.  On the other hand, real increases in imports subtract from GDP because they represent either consumption or investment that was added to another GDP component that shouldn't have been, because it was not produced in our country and hence is not part of our national product.  So conversely, the decrease in imports means that more of the quarter’s consumption or investment was produced domestically, and hence the 4th quarter decrease in real imports added 0.71 percentage points to 4th quarter GDP.  As a result, our improving trade imbalance added a net 0.56 percentage points to 4th quarter GDP, after our improving trade deficit had added 2.86 percentage points to our GDP in the third quarter…

Finally, real consumption and investment by all branches of government increased at a 3.7% annual rate in the 4th quarter, after growing at an identical 3.7% rate in the 3rd quarter, as federal government consumption and investment grew at a 6.2% rate, while state and local consumption and investment grew at a 2.3% rate.  Inflation adjusted federal spending for defense grew at a 2.4% rate and added 0.09 percentage points to 4th quarter GDP growth, while real non-defense federal consumption and investment grew at a 11.2% rate and added 0.30 percentage points to GDP.  Note that federal government outlays for social insurance are not included in this GDP component; rather, they are included within personal consumption expenditures only when such funds are spent on goods or services, indicating an increase in the output of those goods or services. Meanwhile, state and local government investment and consumption expenditures grew at a 2.3% annual rate and added 0.25 percentage points to the growth of 4th quarter GDP, as a real increase in state and local investment at a 2.9% annual rate accounted for 0.06 percentage points of that addition to GDP…

Note: the above was first published as part of my weekly synopsis at MarketWatch 666.