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Economic Growth Outpaces Expectations

The U.S. economy's faster-than-expected growth at the end of last year, powered by companies replenishing stockpiles, is likely to weaken as consumers keep a lid on spending.

The 5.7 percent annual growth rate in the fourth quarter was the fastest pace since 2003. It marked two straight quarters of growth after four quarters of decline. Growth exceeded expectations mainly because business spending on equipment and software jumped much more than forecast.

Still, economists expect growth to slow this year as companies finish restocking inventories and as government stimulus efforts fade. Many estimate the nation's gross domestic product will grow 2.5 percent to 3 percent in the current quarter and about 2.5 percent or less for the full year.

That won't be fast enough to significantly reduce the unemployment rate, now 10 percent. Most analysts expect the rate to keep rising for several months and remain close to 10 percent through the end of the year.

High unemployment and stagnant wage growth will likely keep consumers cautious about spending. Wages and benefits paid to U.S. workers posted a scant gain in the fourth quarter. And for all of last year, workers' compensation rose by the smallest amount on records going back more than a quarter-century.

The economic recovery could falter if consumers, who account for 70 percent of economic activity, lack the income to ramp up spending.

"That's why there's so much hand-wringing right now," said Brian Bethune, chief U.S. financial economist for IHS Global Insight. "Can the economy really sustain this? That's the big question mark sitting out there."

With hiring still weak, President Barack Obama has stepped up his focus on job creation. On Friday, he said his administration has "stopped the flood of job losses," but much more needs to be done to help the millions of people still out of work.

Appearing Friday at Chesapeake Machine Co. in Baltimore, Mr. Obama put in a pitch for legislation he is seeking from Congress to provide tax breaks for small businesses that hire additional workers.

"It's time to put Americans back to work," Mr. Obama said, while acknowledging that "we've got a long way to go to make up for the millions of jobs lost this recession."

He said the economic growth in the last quarter an encouraging development. The president said he would take unpopular steps, if necessary, to get the economy going again.

About 60 percent of the fourth quarter's growth resulted from a sharp slowdown in the reduction of inventories as firms began to rebuild stockpiles depleted by the recession.

Changes to inventories added 3.4 percentage points to the fourth-quarter growth, the Commerce Department said in its report Friday. Excluding inventories, the economy would have grown at a 2.2 percent clip, the government said. That's an improvement from 1.5 percent in the third quarter.

Consumer spending rose 2 percent, down from a 2.8 percent rise in the third quarter. It added 1.4 percentage points to GDP growth.

A steep increase in exports also helped boost growth last quarter. The shipment of goods overseas rose 18.1 percent, far outpacing a 10.5 percent rise in imports. Net exports added 0.5 percentage point to GDP.

Government spending was actually a slight drag on growth in the fourth quarter: A small increase in federal spending was outweighed by a drop in state and local spending.

A drop in defense spending accounted for the decline. Federal government spending is likely to pick up and add to growth in the first quarter, Bethune said.

Business spending will likely boost economic growth for several quarters, Bethune said, though not likely enough to make up for sluggish consumer spending. Many companies are upgrading computers, cell phones and machinery as their equipment needs to be replaced just to maintain current levels of production.

In addition, many businesses have healthy balance sheets and don't need to pay off the large debts that households are struggling with, Bethune added.

For now, the growing economy is benefiting companies up and down the supply chain. Ford Motor Co. this week reported higher fourth-quarter sales and its first annual profit in four years, as it recovers from the devastating downturn the auto industry.

Ford's "recent success has benefited us," said Tom Schumann, general manager of EC Kitzel & Sons Inc., a small cutting tool fabricator based in Cleveland, Ohio.

The company, which has 30 employees, bought a new machine tool in December and hired a new worker to run it, the company's first hire since last spring. Still, many of the company's suppliers are struggling.

"I'm not totally convinced we're out of the woods yet," Schumann said, referring to the economy.

Friday's report is the first of the government's three estimates of gross domestic product and is likely to be revised. The government initially estimated third quarter growth was 3.5 percent, which was later revised down to 2.2 percent. The next estimate will be released Feb. 26.

The report provided an upbeat end to an otherwise dismal year: The U.S. economy declined 2.4 percent in 2009, the largest drop since 1946. That's the first annual decline since 1991.

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