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US grew at fastest pace for 18 months in fourth quarter

Federal Reserve warns that economy still faces big risks and predicts soft growth

The US economy grew at its fastest pace in 18 months in the fourth quarter of 2011, but a strong rebuilding of stocks by businesses and a slower pace of spending on capital goods hinted at softer growth early this year.

US gross domestic product expanded at a 2.8pc annual rate, the commerce department said yesterday, a sharp acceleration from the 1.8pc of the previous three months and the quickest pace since the second quarter of 2010.

It was, however, a touch below economists' expectations in a Reuters poll for a 3pc rate, and nearly 2 percentage points were due to the build-up in business inventories.


The report supported the Federal Reserve's ultra-easy monetary policy stance to nurse the recovery.

"This seems consistent with the Fed's view that the US economy is going to need all the help it can get to hit escape velocity in the next couple years," said David Watt, a senior currency strategist at RBC Capital in Toronto.

US stock index futures turned negative after the data, while government debt prices pared losses. The euro held gains against the dollar.

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 $56bn (€42.38bn), adding 1.94 percentage points to GDP growth. Excluding inventories, the economy grew at a tepid 0.8pc rate, a sharp step-down from the prior period's 3.2pc pace.

The robust stock accumulation suggests the recovery will lose a step in early 2012.

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 Fed on Wednesday to say it expected to keep interest rates at rock bottom levels at least through late 2014.

Federal Reserve chairman Ben Bernanke said the central bank, which forecast growth this year in a 2.2pc to 2.7pc range, was mulling further asset purchases to speed up the recovery.

The Fed warned the economy still faced big risks, a suggestion the eurozone debt crisis could still hit hard. The economy grew 1.7pc in 2011 after expanding 3pc the prior year. (Reuters)

Irish Independent