FIRST, the good news. According to preliminary estimates from the Bureau of Economic Analysis, American economic growth continued to accelerate as expected in the fourth quarter of 2010. Real GDP expanded at a 3.2% annual pace, up from 2.6% in the third quarter and the fastest pace since the first three months of the year. This was the sixth consecutive monthly expansion, and it pushed the American economy above an important psychological threshold: real output is finally, at long last, above the pre-recession peak. It only took three years to regain that ground.

The 3.2% rate was a little less than the 3.5% economists had forecast, but this is the preliminary release; two further revisions will occur in the months to come. The biggest boost to growth came from accelerating growth in personal consumption, the lion's share of which was from purchases of durable goods. Consumer spending was up at a 4.4% annual pace (compared to 2.4% in the third quarter). Of the 3.2% total growth pace, 3.02 percentage points were contributed by personal consumption.

Gains were also attributable to a nice improvement in exports. Net exports contributed positively to growth for the first time all year. But for the first time in almost two years, federal government spending joined state and local spending as a drag on growth. This trend will continue; generally speaking, future growth will have to come despite government cuts rather than thanks to government supports. Meanwhile, the Fed got little to worry it on the inflation front. Its favoured inflation measure—the core price index for personal consumption expenditures—came in at a 0.4% annual growth rate. That measure has declined steadily from the fourth quarter of last year.

So what about the bad news? Well, given the size of the output gap—for now, about $800 billion separates actual and potential real output—the economy should be growing faster. For 2010 as a whole, output expanded by 2.9%. That's the fastest growth since 2005, but at this point in the early 1990s business cycle annual growth was up (despite a smaller output gap) at a 3.4% pace, and at this point in the early 1980s cycle annual growth was roaring ahead at 4.5%. Current growth is consistent with a painfully slow reduction in the unemployment rate. Forecasters anticipate a further acceleration in 2011, perhaps to an annual rate near 4%. The jobless can only hope such predictions come true.

And they well might. Both consumption and investment have been very depressed for the past few years, and a continued rebound would not be surprising. Meanwhile, it seems likely that America's trade balance will continue to improve, which would provide additional support for growth. The big continued question marks concern the problems in government budgets—how much a drag on growth they will ultimately represent—and the labour market. If growth begins translating into an acceleration in hiring, that could change the psychology around the economy, fueling spending and investment. And then recovery might finally resemble the V-shape one would expect after such a long, deep, and painful downturn.