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Jan 27, 8:45 AM EST

Economy grew modest 2.8 pct. in Q4, best in 2011


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WASHINGTON (AP) -- The U.S. economy grew at a 2.8 percent annual rate in the final three months of last year, the fastest growth in 2011.

Americans spent more on cars and trucks, and companies built up their stockpiles. But growth in the October-December quarter - and all of last year - was held back by the biggest annual government spending cuts in four decades.

The Commerce Department said Friday that the economy grew just 1.7 percent last year, roughly half of the growth in 2010 and the worst since the recession.

Most economists expect businesses to ease up on restocking in the first three months of the year. That should slow first-quarter growth. And consumers may cut back on spending if their wages continue to lag inflation.

In the final three months of last year, consumer spending grew at a 2 percent annual rate. That's up modestly from the third quarter.

Much of the growth was powered by a 14.8 percent surge in sales of autos and other long-lasting manufactured goods.

Incomes, which have been weak all year because of high unemployment, grew at a modest 0.8 percent rate. That followed two straight quarters of declining incomes.

Consumer spending is important because it makes up 70 percent of economic activity.

Spending by government at all levels fell at an annual rate of 4.6 percent in the fourth quarter and 2.1 percent for the year - the biggest decline since 1971.

Sweeping federal defense cuts at the beginning and end of 2011 were a major factor.

Richard DeKaiser, a senior economist at Parthenon Group, expects just 2 percent annual growth in the January-March quarter. But Kaiser says that should be the weakest quarter. He expects the economy to gain strength in each quarter and grow 2.6 percent for the entire year.

Other data show the economy ended 2011 on a strong note. Companies invested more in equipment and machinery in December. The unemployment rate fell to 8.5 percent last month - the lowest level in nearly three years - after the sixth straight month of solid hiring.

People are buying more cars, and consumer confidence is rising. Even the depressed housing market has shown enough improvement to make some economists predict a turnaround has begun.

Still, many economists worry that a recession in Europe could dampen demand for U.S. manufactured goods, which would slow growth. And without more jobs and better pay, consumer spending is likely to stagnate.

The Federal Reserve signaled this week that a full recovery could take at least three more years. In response, it said it would probably not increase its benchmark interest rate until late 2014 at the earliest - a year and a half later than it had previously said.

The central bank also slightly reduced its outlook for growth this year, from as much as 2.9 percent forecast in November down to 2.7 percent. The Fed sees unemployment falling as low as 8.2 percent this year.

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