The expansion of the US economy accelerated in the fourth quarter of 2011, according to last Friday’s advance estimate from the Bureau of Economic Analysis. Real gross domestic product (GDP) increased at an annual rate of 2.8 percent, up from 1.8 percent in the third quarter. The advance estimate is based on incomplete information and is subject to large revisions. Nonetheless, it represents the strongest pace of growth since the second quarter of 2010 and a sharp improvement over the prior quarters. For the year, the advance estimate raises growth in 2011 to just 1.7 percent, down from 3.0 percent the year before.

Not as Good a Result as it Seems

While the fourth quarter estimate compares favorably with the balance of the year, markets were hardly impressed. The Dow Jones Industrial Average slipped by 74 points by the close of trading on Friday. Business news coverage parsed the result in terms of analyst estimates, which anticipated a quarter-to-quarter change of 2.7 percent to 3.6 percent. Large drags from lower federal defense spending and cuts in state and local government activity precluded a better result.

Disaggregating the estimate, economists and policymakers are more concerned with the very large contribution of private inventories to the headline finding. Private inventories added 1.94 percentage points to the estimate of GDP. It is unlikely that heady result will carry over into future quarters, even if it anticipates strengthening final demand for goods. Unless other contributors to GDP offset a moderation in the inventory buildup, we can expect that the overall pace of growth will slow.

Growth Outlook for 2012 

In its January update to its World Economic Outlook, the International Monetary Fund projects that US momentum will fall flat in 2012, with GDP increasing by 1.8 percent. The central tendency projections released by the Federal Reserve following last week’s meeting of the Federal Open Markets Committee are somewhat more sanguine. Growth will improve in 2012, but is not expected to maintain the fourth quarter’s pace. The Fed now projects GDP will expand between 2.2 percent and 2.7 percent in 2012 and between 2.8 percent and 3.2 percent in 2013. That is a downward adjustment from the November projection and one that strikes a cautionary note with regard to expectations for job growth and related absorption.