Growth in private

The US private sector is emerging from government’s shadow. Headline annualised GDP growth of 2.8 per cent in Friday’s fourth-quarter data looks more anaemic when inventory growth is netted out. But overall in 2011, as government retreated, private enterprise has regained strength.

At first glance, the first estimate of fourth-quarter economic growth was disappointing. The headline number was below the consensus forecast, while nearly two percentage points of growth were represented by inventory accumulation, generally considered a negative factor since it isn’t usually sustainable. Personal consumption expenditures were subdued, growing at just two per cent, as was non-residential fixed investment, at 1.7 per cent.

But on closer inspection the figures were stronger than they looked. Relatively weak final sales and domestic consumption followed surges in those factors in the previous quarter, while the inventory build-up followed a previous quarter drawdown, thus probably holding few negative implications for the future.

Moreover, government has been shrinking and the private sector correspondingly strengthening. For 2011 as a whole US GDP grew only 1.7 per cent. But gross private product, which excludes government expenditure, grew 2.7 per cent. In the fourth quarter, the private sector grew at a robust 4.5 per cent annual rate, while government shrank at both the federal and state and local levels.

Inflation was also subdued during the quarter, presumably affected by the decline in resource prices in the autumn. For 2011, the price index for personal consumption expenditures, Federal Reserve Chairman Ben Bernanke’s favourite inflation metric, grew at 2.4 per cent, a restrained level – if still 0.4 percentage point above the Fed’s newly stated target.

That means the private sector is growing at a rate that will reduce unemployment, even if it’s slower than might be hoped after a deep recession. This, more than the process to select his Republican opponent, may explain why the probability of President Barack Obama being re-elected in November has increased to 55 per cent on the Intrade prediction market from about 52 per cent a week ago. If the growth trend keeps up, so will his chances.