NEW YORK -- The advance estimate of U.S. fourth quarter 2011 GDP growth was 2.8 percent, which was up from 1.8 percent and 1.3 percent increases in the third and second quarters, respectively, RBC Economics Research reported today.

The increase was slightly below market expectations for a 3 percent increase, said Nathan Janzen, an economist with RBC.  

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 percent rate in the fourth quarter, which was up from a 1.7 percent gain in the third quarter that was already stronger than the disappointing 0.7 percent second-quarter increase.

Residential investment rose a solid 10.9 percent in the fourth quarter of 2011, thereby marking the third consecutive quarterly increase following 1.2 percent and 4.2 percent increases in third and second quarters, respectively.

Providing the mains source of offset to stronger activity elsewhere, government spending plunged 4.6 percent in the fourth quarter of 2011, which was led by a 12.5 percent 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 percent rate from an outsized 15.7 percent 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 percent 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 percent per quarter," said Janzen.

"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," he explained. "This suggests some downside risk to our forecast for GDP growth early in 2012. However, recent strengthening in labor 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 defense spending in the fourth quarter of 2011 is also unlikely to be repeated," said Janzen.

"Potential spill over from events in Europe and ongoing domestic fiscal retrenchment continue to provide sources of downside risk," he added. "However, the flow of data available to this point remains broadly consistent with GDP growth remaining close to the 2.8 percent fourth-quarter 2011 rate in the current quarter."

SOURCE: RBC Economics Research press release