by Calculated Risk on 1/31/2007 10:28:00 AM

From MarketWatch: GDP surges at 3.5% rate in fourth quarter

Fed by robust consumer spending, a drop in energy prices and big turnaround in the trade balance, the economy notched its highest growth in a year, offsetting the drag of the weak housing and auto sectors.

The 3.5% growth rate was much stronger than the 2% recorded in the third quarter, and handily beat the 3% expected by economists surveyed by MarketWatch.

Consumer prices fell 0.8% annualized in the quarter, the first quarterly decline in 45 years and the biggest drop in 52 years.

As predicted, PCE inflation was negative in Q4, for the first time in 45 years. And PCE was everything in this report. Residential investment fell 19.2% annualized. Nonresidential investment fell 0.4%, the biggest drop in nearly four years.

UPDATE: On Investment.

Click on graph for larger image.

This graph shows the YoY change in residential investment vs. nonresidential investment. In general, residential investment leads nonresidential investment. There are periods when this observation doesn't hold - like '95 when residential investment fell and the growth of nonresidential investment remained strong.

Another interesting period was 2001 when nonresidential investment fell significantly more than residential investment. Obviously the fall in nonresidential investment was related to the bursting of the stock market bubble. But typically changes in residential investment lead changes in nonresidential investment, and GDP, by three to five quarters. Something to watch.