The robust performance closed out a year in which the economy contracted 2.4 percent, the biggest decline since 1946.
After falling off a cliff at the start of the year, U.S. gross domestic product turned higher in the third quarter, and the quickening fourth-quarter pace reported by the Commerce Department on Friday suggested a sustainable recovery was building.
Wow, great number. It's very solid and gives us a running start into the second half of the year when we can't rely on government stimulus, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
That's part of the plan, to get us moving as fast as possible so when life support is removed we'll have a pulse.
U.S. stocks opened higher on the surprisingly strong data, while Treasury debt prices deepened losses. U.S. dollar rose against the yen. Economists had expected GDP to rise at a 4.6 percent pace.
Getting the economy on a sustainable growth track remains one of the key challenges facing President Barack Obama, who on Wednesday outlined a raft of measures to create jobs and nurture the recovery.
Growth in the fourth quarter was boosted by a sharp slowdown in the pace of inventory liquidation.
When businesses are selling off inventories, there is less of a need to step up production and it weighs on GDP. The slowing rate of inventory reduction in the fourth compared to the third quarter lifted GDP by nearly 3.4 percentage points.It was the biggest percentage contribution inventories have made since the fourth quarter of 1987.
But even stripping out inventories, the economy expanded at an annual rate of 2.2 percent, accelerating from the 1.5 percent increase in the third quarter, reflecting relatively strong performance from other segments of the economy.
Still, this measure of final demand is meagre compared with most normal recoveries, implying the Federal Reserve can bide its time before raising interest rates.
The economy continues to improve, but we do not have an economic boom here, said John Silvia, chief economist at Wells Fargo Securities in Charlotte, North Carolina.
CONSUMER SPENDING SLOWS, BUSINESS INVESTMENT RISES
Consumer spending increased at a 2 percent annual rate in the fourth quarter, contributing 1.44 percentage points to GDP. In the third quarter, consumer spending had risen at a 2.8 percent pace, supported by the government's cash for clunkers programme.
Business investment grew at a 2.9 percent rate, the first increase since the second quarter of 2008, as the drag from the troubled commercial real estate was offset by robust spending on equipment and software.
The growth of spending on new home construction braked sharply in the fourth quarter to an annual rate of 5.7 percent from an 18.9 percent pace in the third quarter. Home building has received a lift from a popular tax credit for first-time buyers, but recent data have hinted at some weakness starting to creep in.
Export growth outpaced imports, narrowing the U.S. trade gap and adding half a percentage point to GDP growth in the last quarter.A separate report from the Labour Department showed employment costs rose 0.5 percent in the fourth quarter, just a touch higher than analysts had expected.
Wages and salaries, which make up about 70 percent of compensation, and benefits were both up 0.5 percent, showing little inflation pressure arising from wages.
(Reporting by Lucia Mutikani; Editing by Neil Stempleman)