According to today’s data release from the Bureau of Economic Analysis, gross domestic product—the broadest measure of the nation’s economic activity—grew at an annualized rate of 2.8 percent in the fourth quarter of 2011, an increase from the previous quarter’s 1.8 percent growth rate and the highest quarterly rate of growth since the second quarter of 2010.* While 2.8 percent growth would likely put very mild downward pressure on the unemployment rate if sustained over a year, it is unclear if the growth trend of GDP is even as high as this quarter’s release suggests; for all of 2011, growth was just 1.7 percent, and the average of Blue Chip forecasts is 2.4 percent growth for all of 2012.

While the quarter’s growth rate was dragged down considerably by a sharp reduction in federal defense spending (which reduced the quarter’s growth rate by 0.7 percentage point), it was buoyed by a very large positive contribution from the change in private inventories (which added 1.9 percentage points to the quarter’s growth rate). Both defense spending and the change to private inventories are particularly volatile parts of the economy, so looking at the quarter’s performance without these two components probably provides the best way to assess the “true” health of the economy.

This health is poor. Final demand (GDP minus the impact of inventory changes) grew at only an 0.8 percent rate in the quarter, while domestic demand (final demand that adds imports but subtracts exports—a measure of how much U.S.-based households, businesses, and governments are demanding) grew at only 0.9 percent. Even stripping out the downward drag of defense spending would only lift these measures to 1.5 percent and 1.6 percent, respectively.

Personal consumption expenditures grew at only a 2 percent rate for the quarter, and every category of non-residential fixed investment decelerated from the previous quarter. Investment in non-residential structures actually contracted at a 7.2 percent rate for the quarter, following six previous months of rapid growth. Investment in equipment and software, which had averaged 12.9 percent annualized growth rates in the previous nine quarters, decelerated to a 5.2 percent growth rate in the last quarter of 2011.

Net exports subtracted 0.1 percentage point from the quarter’s growth after six previous months of contributing to growth.

Federal non-defense spending contributed 0.1 percentage point to the quarter’s growth rate, while state and local government spending subtracted 0.3 percentage point—the ninth quarter of the last 10 that saw the state and local sector provide a drag on growth.

Perhaps most worrisome in this report, disposable personal income rose at only a 0.8 percent rate after adjusting for inflation. What this means is that even the small growth in consumption spending in the quarter (which increased at a 2 percent rate) was partially financed by a reduction in the personal savings rate, which fell to 3.7 percent of disposable personal income—the fifth straight quarter of decline and the lowest savings rate since the last quarter of 2007.

Price growth remains muted, with the “market-based” deflator for personal consumption expenditures minus food and energy (a closely watched measure of “core” price inflation) rising only 1.8 percent relative to the same quarter one year ago.

*All rates of change cited in this report are also annualized rates of change.