The advance estimate of US fourth-quarter 2011 GDP growth was 2.8%, which was up from 1.8% and 1.3% increases in the third and second quarters, respectively, although slightly below market expectations for a 3.0% increase. The main contributor to the acceleration in growth in the fourth quarter of 2011 was a sizeable 1.9 percentage point addition from inventories that more than reversed a 1.4 percentage point drag in the third quarter of 2011. Consumer spending growth accelerated modestly to a 2.0% rate in the fourth quarter, which was up from a 1.7% gain in the third quarter that was already stronger than the disappointing 0.7% second-quarter increase. Residential investment rose a solid 10.9% in the fourth quarter of 2011, thereby marking the third consecutive quarterly increase following 1.2% and 4.2% increases in third and second quarters, respectively.

Providing the mains source of offset to stronger activity elsewhere, government spending plunged 4.6% in the fourth quarter of 2011, which was led by a 12.5% decline in defence spending. The drop in defence spending itself subtracted 0.7 percentage points from quarterly GDP growth. As well, growth in business investment slowed to a 1.7% rate from an outsized 15.7% gain in the third quarter. Net exports subtracted 0.1 percentage points from GDP growth after adding 0.4 percentage points in the third quarter.

The rise in GDP in the fourth quarter of 2011 leaves the average annualized pace of growth for the second half of 2011 at 2.3% that, while still modest for this point in an economic recovery, marks an encouraging acceleration from the first half of the year when growth averaged less than a 1% per quarter. Much of the strength in the fourth quarter of 2011 reflected a sizeable addition to growth from inventories that is not likely to be repeated. This suggests some downside risk to our forecast for GDP growth early in 2012; however, recent strengthening in labour markets, including a slowing trend in layoffs, bodes well for consumer spending to continue to grow. As well, early indications of improving business confidence and a sharp rise in capital equipment orders in December point to a return to stronger growth in business investment, and the sharp decline in government defence spending in the fourth quarter of 2011 is also unlikely to be repeated. Potential spill over from events in Europe and ongoing domestic fiscal retrenchment continue to provide sources of downside risk; however, the flow of data available to this point remains broadly consistent with GDP growth remaining close to the 2.8% fourth-quarter 2011 rate in the current quarter.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.