WASHINGTON (MarketWatch) — The U.S. economy grew at the fastest rate in a year and a half in the fourth quarter, but a large chunk of the increase was fueled by an unexpected buildup in inventories, according to a preliminary government estimate.

Gross domestic product from October through December expanded at 2.8% pace, the Commerce Department reported Friday. Economists surveyed by MarketWatch had projected GDP would rise at a 3.0% rate.

Yet much of the increase stemmed from a buildup in inventories. Businesses may have accumulated excess stock on hand and didn’t sell as many products as expected during the holiday season, analysts say.
Inventory spending surged to an estimated $56 billion after a $2 billion decline in the third quarter.

“Overall, the pick-up in growth doesn’t look half as good when you realize that most of it was due to inventory accumulation,” said Paul Ashworth, chief U.S. economist at Capital Economics.
As a result, most economists expect companies to cut back on inventories in the first three months of 2012. Growth is expected to slow to 1.9% in the first quarter, the latest MarketWatch forecast shows.
“The economy gathered some momentum in the fourth quarter, but the result was still below what many were hoping for,” said Jim Baird, chief investment strategist at Plante Moran Financial Advisors.
Reflecting the disappointment, U.S. stock futures  turned lower after the GDP report.

Better finish than start

Still, the U.S. clearly ended 2011 on a higher note after a tepid start. Growth in the first quarter of last year, for example, was a meager 0.4%.
Inventories aside, the economy also got a boost in the fourth quarter from stronger consumer spending, exports and residential investment.
Consumer spending rose 2.0%, up from a 1.7% pace in the third quarter. Consumer spending accounts for at least two-thirds of U.S. economic growth.
Consumer sales of durable goods such as automobiles jumped 14.8% — about three times faster than in the third quarter.
Investment in homes and apartments jumped nearly 11%, accelerating after a small increase in the third quarter.

Yet spending on services rose a scant 0.2% while businesses increased investment by a disappointingly small 1.7%, down from 15.7% in the third quarter. Purchases of software and equipment rose a modest 5.2%.

http://www.marketwatch.com/story/economy-expands-28-in-fourth-quarter-2012-01-27