The improvement in GDP growth in the third quarter of 2011 reflected relatively broadly based improvements across most expenditure categories. Consumer spending rose at a 2.4% rate, thereby marking a welcome acceleration from the disappointing 0.7% increase in the second quarter of the year. Part of the third quarter improvement reflected an easing in the supply-chain pressures that resulted from the natural disasters in Japan in March, which limited the availability of some automobile models in the second quarter of 2011 although spending on services picked up notably as well. Growth in business investment accelerated to a solid 16.3% pace from an already decent 10.3% increase in the second quarter. Investments in equipment and software (17.4%), and non-residential structures (13.3%) improved notably in the third quarter. Net trade added a small 0.2 percentage points to overall GDP growth reflecting a 4.0% rise in exports that outpaced a more moderate 1.9% increase in imports.

The only offset in the quarter was a slowdown in inventory accumulation that subtracted 1.1 percentage points from headline GDP growth. Government spending was flat while residential investment posted its second consecutive modest quarterly increase, rising 2.4% following a 4.2% increase in the second quarter. In all, final sales to domestic buyers, which excludes the effect of both net trade and inventories, rose at a solid 3.2%, which is up from 1.3% in the second quarter.

Growth in the core PCE deflator, the key inflation measure in the report, moderated to an annualized 2.1% from 2.3% in the second quarter.

The pace of U.S. GDP growth in the third quarter remains historically modest for this point in an economic recovery; however, the acceleration from disappointing 1.3% and 0.4% increases in the second and first quarters of 2011, respectively, is encouraging. While much of the improvement reflected a rebound in growth as transitory factors that weighed on activity in the first half of the year eased in the third quarter, monthly indicators of economic activity have, to this point, shown relatively little effect from the sharp deterioration in economic sentiment in recent months. Importantly, the pace of layoffs has moderated in recent weeks, pointing to the potential for hiring to improve in the fourth quarter of the year. As well, retail sales picked up at a solid pace in September, and early indicators hint that spending rose once again in October (RBC expects an improvement in October auto sales to a 13.4 million annualized rate from 13.0 million in September). Risks surrounding potential fallout from the European sovereign-debt crisis remain; however, to this point, the near-term data flow remains consistent with our forecast for GDP to rise a further 2.3% in the fourth quarter.

In another report out this morning, initial unemployment insurance claims slipped 2,000 to 402,000 in the week ending October 22, 2011 from a revised 404,000 (previously 403,000) the previous week. The level of claims was just slightly above market expectations for a 401,000 reading. The four-week moving average of initial claims, which normally provides a better indication of the underlying trend in labour markets, inched up for the first time in five weeks, rising to 405,500 from 403,750 (revised from 403,000) the previous week, but it remains well below the near-term peak of 422,250 posted in the middle of September. Continuing claims (for the week ending October 15, 2011) fell 96,000 to 3,645,000, thereby more than reversing the previous week’s 48,000 rise to 3,741,000.

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.