U.S. economy growing faster, but still struggling

@CNNMoney January 27, 2012: 10:11 AM ET
GDP report

Economic growth picked up pace in the fourth quarter of 2011.

NEW YORK (CNNMoney) -- The United States economy picked up speed at the end of 2011 as businesses substantially built up their inventories and consumers increased their spending.

Gross domestic product, the broadest measure of the nation's economic health, grew at a 2.8% annual rate in the last three months of the year, the Commerce Department said.

While that's a major improvement from 1.8% in the prior quarter, and the fastest since the second quarter of 2010, it still fell short of economists' expectations of 3.2% and sent stock futures falling.

Signs of weakness

While the number appeared to come in strong, there were still signs of overall weakness, and economists remain cautious about the outlook for the economy.

One reason is that the bulk of the growth came from just one area: businesses building up their stock of goods. Private businesses increased inventories $56 billion in the fourth quarter, following a decrease of $2 billion in the third quarter.

An increase on that front can be seen as a double-edged sword. On one hand, it can be a sign of confidence in the economy. When firms predict greater purchases in the future, they build up their inventories.

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On the other hand, if consumers don't end up buying as much as firms had hoped, that can be a drag on GDP.

"How much of the inventory increases were intended and how much were unintended? " said Bruce Yandle, an economics professor at the Mercatus Center at George Mason University. "There may be something here to be concerned about."

After subtracting the change in private inventories from the data, the report showed GDP grew only 0.8% in the fourth quarter, compared with 3.2% in the third.

Consumer spending picked up to a 2% annual rate from 1.7% in the prior quarter. While the quarter included holiday spending, the government adjusts the GDP figures to try to account for seasonal trends.

Meanwhile, business investment in equipment and software, which had been a strong driver of growth earlier in the year, slowed in the quarter. Cuts in state and local government dragged on economic growth for the sixth quarter in a row.

While economic growth overall picked up at the end of 2011, doubts remain about whether the recovery can keep building momentum.

"This will be the strongest gain in GDP as the economy is likely to return to a 2% to 2.5% pace for the year ahead," John Silvia, Wells Fargo chief economist, said in a note.

For the full year, GDP grew 1.7% in 2011, a substantial slowdown from 3% growth in 2010.

Fed forecasting breaks new ground

The report comes just two days after the Federal Reserve lowered its outlook for the economy in 2012. The central bank expects the economy to grow between 2.2% and 2.7% this year.

The Fed also announced Wednesday that it plans to keep the federal funds rate near zero until late 2014 because the economy remains too weak to warrant higher interest rates any time soon. To top of page

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