The economy grew at a slightly slower rate than expected in the 4th quarter, but increased consumer spending led to a 3.2% annualized rate. This was the highest output in four years, since before the recession.

One particularly encouraging detail in the report: Final sales — GDP minus the change in business inventories — grew at a whopping 7.1% annual rate, an encouraging sign of strong underlying demand in the U.S. economy

GDP grew by 2.6% in the third quarter of last year, by 1.7% in the second and by 3.7% in the first of last year. Economists polled by Dow Jones Newswires were expecting GDP to rise by 3.5% in the last quarter of 2010.

Consumer spending, accounting for about 70% of demand in the U.S. economy, rose at a 4.4% rate in the fourth quarter. That’s the fastest pace since the start of 2006 and double the average rise in spending in the previous three quarters of 2010.

Congress did institute a number of measures, including a small business lending fund and a basket of fiscal aid for the states, that hit at the end of last year. And net exports increased from October to December for the first time in 2010. Private inventories actually fell pretty drastically, canceling that out. But it’s in the area of consumer spending that makes analysts believe that the economy is sustainable without further help from the government, which is going to be the outcome at best (harm from the government is a distinct possibility as well).

Hovering around 3% growth would be fine if we had maximum employment. Unfortunately, we have an unemployment rate well over 9%, with many workers dropping out of the economy, and even the most optimistic forecasts show the jobless rate still hovering around 9% by the end of this year, which would mean 32 straight months at that figure. Initial jobless claims spiked last week to 454,000, and the “it was the snow” alibi is beneath the people who made it. When an economy is as slack as it was for so long, 3% growth is fairly anemic.

Bill McBride notes:

The key leading sector – residential investment – has lagged this recovery because of the huge overhang of existing inventory. Usually RI is a strong contributor to GDP growth and employment in the early stages of a recovery, but not this time – and this is a key reason why the recovery has been sluggish so far.

In other words, the failure to fix the housing market is prolonging suffering for millions.

UPDATE: Amazing to comtemplate that the 2.9% overall 2010 growth was the fastest since 2005.

David Dayen

David Dayen