US growth gains pace, but hurdles remain ahead

Washington: The US economy grew at its fastest pace in a year and a half in the fourth quarter, but a strong rebuilding of stocks by businesses and weak spending on capital goods hinted at slower growth in early 2012.

US gross domestic product expanded at a 2.8 per cent annual rate, the Commerce Department said yesterday, a sharp acceleration from the 1.8 per cent 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 per cent rate.

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

For the whole of 2011, the economy grew 1.7 per cent after expanding 3 per cent the prior year.

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.

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 per cent to 2.7 per cent range, was mulling further asset purchases to speed up the recovery.

Big risks

The Fed warned the economy still faced big risks, a suggestion the Eur-ozone 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 US fiscal policy."

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

Repairing the damage

"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 US," Geithner said.

Consumer spending, which accounts for about 70 per cent of US econ-omic activity, stepped to a 2 per cent rate from the third-quarter's 1.7 per cent pace — largely driven by pent-up demand for motor vehicles.

Temporary lift from inventory building

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 gross domestic product growth. Excluding inventories, the economy grew at a tepid 0.8 per cent rate, a sharp step-down from the prior period's 3.2 per cent pace. The robust stock accumulation suggest the recovery will lose a step in early 2012.