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US economy ended 2011 at a healthy pace

Paul Sakuma / AP

Chevy Malibus are shown at a car dealership in San Jose, Calif. An increase in consumer spending, which accounts for about 70 percent of U.S. economic activity, was largely driven by pent-up demand for motor vehicles in the fourth quarter.

By msnbc.com staff and wire

U.S. economic growth picked up speed in the final three months of 2011, expanding at the fastest pace in 1-1/2 years, according to new data released Friday.

The latest U.S. gross domestic product data show the economy expanded at a 2.8 percent annual rate in the October-December quarter, the Commerce Department said -- a sharp acceleration from the 1.8 percent clip of the prior three months and the quickest pace since the second quarter of 2010.

It was, however, a touch below economists’ expectations for a 3.0 percent rate. Also, businesses aggressively restocking their shelves and weak spending on capital goods hinted at slower growth in early 2012.

“The economy ended 2011 on a fairly positive note, but the composition of growth in the last quarter is not favorable for growth early this year,” said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

Sweet made the comments before the report was released. For the whole of 2011, the economy grew 1.7 percent after expanding 3 percent the prior year.

Growth in the fourth quarter got a temporary boost from the rebuilding of business inventories, which was the fastest since the third quarter of 2010, after they declined in the third-quarter for the first time since late 2009.

Inventories increased $56.0 billion, adding 1.94 percentage points to GDP growth. Excluding inventories, the economy grew at a tepid 0.8 percent rate, a sharp step-down from the prior period's 3.2 percent pace.

The robust stock accumulation suggests the recovery will lose a step in early 2012.

Also pointing to slower growth, business spending on capital goods was the slowest since 2009, a sign the debt crisis in Europe was starting to take its toll.

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Expectations of soft growth led the Federal Reserve on Wednesday to say it expected to keep interest rates at rock bottom levels at least through late 2014.

Fed Chairman Ben Bernanke said the central bank, which forecast growth this year in a 2.2 percent to 2.7 percent range, was mulling further asset purchases to speed up the recovery.

The Fed warned the economy still faced big risks, a suggestion the euro zone debt crisis could still hit hard.

“The Fed is attempting to shield the economy from a potentially more severe recession in Europe,” said Sweet. “Even though the economy improved last quarter there are a number of headwinds and a lot of uncertainty surrounding Europe, emerging markets and also U.S. fiscal policy.”

Treasury Secretary Timothy Geithner told the World Economic Forum in Davos the U.S. economy still faced big challenges.

“We're still repairing the damage done by the financial crisis. On top of that we face a more challenging world. We have a lot of challenges ahead in the United States,” Geithner said.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, stepped to a 2 percent rate from the third-quarter's 1.7 percent pace -- largely driven by pent-up demand for motor vehicles.

The Japanese earthquake and tsunami had disrupted supplies early in the year, leaving showrooms bereft of popular models.
Spending was also lifted by moderate inflation.

A price index for personal spending rose at a 0.7 percent rate in the fourth-quarter, the slowest increase in 1-1/2 years, after rising at a 2.3 percent pace in the July-September period.

A core inflation measure, which strips out food and energy costs, increased at a 1.1 percent rate after rising 2.1 percent in the third quarter.

The increase last quarter was the smallest in a year and put this measure well below the Fed's 2 percent target.

Reuters contributed to this report.