The U.S. economy gathered speed in the fourth quarter to regain its pre-recession peak with a big gain in consumer spending and strong exports, removing doubts about the recovery's sustainability.
The economy grew at a 3.2 percent annual rate in the final three months of 2010, after expanding at a 2.6 percent pace in the third quarter, the Commerce Department said on Friday.
Wall Street had looked for a 3.5 percent gain, but the composition of growth gave the report a surprisingly robust tenor: strong consumer and business spending, and a hint at a need for businesses to build up inventories.
Still, it was not seen strong enough to knock the Federal Reserve off track from efforts to support recovery.
The numbers look very good. The economy has got some real good momentum heading into the new year, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York.
He said growth could easily top 4 percent this year, if job creation finally picks up. If the labor market does not come through, the economy is not going to get enough lift.
Investors took little notice of the report, distracted by political unrest in Egypt and weak corporate results, including a steep decline in Ford Motor Corp's quarterly earnings.
U.S. stocks fell from 29-month highs and the Standard & Poor's 500 index was on track to close below its 14-day moving average for the first time in two months. Prices for U.S. government bonds rose.
The turmoil in Egypt also lifted the dollar against a basket of currencies as investors sought a safe haven.
For the whole of 2010, U.S. gross domestic product grew 2.9 percent, the biggest gain since 2005 but an advance too weak to whittle away at the unemployment rate, which ended the year at 9.4 percent. Output contracted 2.6 percent in 2009.
I think there is much more confidence now that we've got a sustainable expansion, U.S. Treasury Secretary Timothy Geithner said at the World Economic Forum in Davos, Switzerland before the data was released.
But he cautioned: It is not a boom. It's not going to offer the prospect of a rapid decline in the unemployment rate.
CONSUMERS SHOULDER RECOVERY
During the fourth quarter, consumer spending grew at a 4.4 percent rate, the fastest since the first three months 2006. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, added about 3 percentage points to GDP growth, its largest contribution in more than four years.
Consumers are growing more confident. The Thomson Reuters/University of Michigan's consumer sentiment index rose to 74.2 from 72.7 early this month, a separate report showed.
Though analysts do not expect consumer spending to continue rising at such a brisk pace, they expect it to remain strong.
Indeed, Ford raised its forecast for 2011 U.S. auto sales to 13 million to 13.5 million vehicles after previously saying they could be as low as 12.5 million.
Another pillar of growth was exports. An 8.5 percent jump in exports combined with a 13.6 percent plunge in imports to add 3.44 percentage points to GDP growth, the first contribution from trade in a year and the biggest since 1980.
But economists said the boost from trade was likely to be fleeting as a need by businesses to rebuild stocks would lead to a pick-up in imports.
In the fourth quarter, inventory growth slowed sharply to subtract from GDP growth for the first time since the second quarter of 2009. Economists said businesses probably had underestimated the strength of demand and would now need to restock, which should force further gains in production.
Consumer spending is solid and it's likely to remain decent. That means we're probably going to see an inventory build-up in the first half of the year, said Neil Dutta, an economist at Bank of America Merrill Lynch in New York.
If businesses had not put the brakes on inventory growth, the economy would have expanded at a 7.1 percent clip. That would mark the biggest increase in domestic and foreign demand in more than 26 years. In contrast, domestic purchases grew at a much more moderate 3.4 percent rate.
EMPLOYMENT STILL LAGGING
Even with growth quickening, progress reducing unemployment has been painfully slow, and the report is little comfort for the millions of unemployed Americans, or for U.S. central bank officials on a jobs-creation vigil.
On Wednesday, Fed officials voiced concern the pace of the recovery was still not strong enough to significantly lower unemployment and reiterated a commitment to a $600 billion stimulus effort through the purchase of government bonds.
Businesses have been hesitant to hire but have used their vast cash reserves for investments, and spending on equipment and software notched a seventh straight quarterly gain.
Home building also helped support growth, although it could be hurt early this year by the harsh winter weather pounding some parts of the country. Government spending contracted, with much of the drag coming from state and local governments.
The report showed inflation quickening on a surge in food and gasoline costs. But a core price index closely watched by the Fed advanced at a record low 0.4 percent pace, suggesting broad price pressures are not building.
(Editing by Chizu Nomiyama)