MercoPress. South Atlantic News Agency

US economy expands 2.8% in fourth quarter but with too much inventory building

“Recovery is reasonably well established” but not the jobs market says Larry Summers

The US economy grew at its fastest pace in one and a half years 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.

GDP climbed at a 2.8% annual pace following a 1.8% gain in the prior quarter, Commerce Department figures showed on Friday. The median forecast of 79 economists surveyed by Bloomberg called for a 3% increase. Growth excluding a jump in inventories was 0.8%.

Federal Reserve officials this week said they were concerned about the economy's lack of vigour two years after the recession ended, prompting a pledge to keep interest rates low at least until late 2014. The biggest gain in GDP since the second quarter of 2010 indicates the world's largest economy has so far withstood the effects of the debt crisis in Europe.

The Standard & Poor's 500 Index fell 0.2% to 1,316.33 at the close of trading in New York. The yield on the five-year Treasury note fell two basis points to 0.75% after earlier dipping below 0.74% to a record low.

“Recovery is reasonably well established” Larry Summers, a former director of the National Economic Council under President Barack Obama, said in an interview at the World Economic Forum's annual meeting in Davos, Switzerland.

“Is escape velocity at a sufficient rate to get us back to full employment in a reasonable interval yet established?” he said. “I think one would have to say the answer to that question is 'No.'”

A gain in consumer confidence reported on Friday may help fuel further spending. The Thomson Reuters/University of Michigan final index of consumer sentiment climbed to 75 in January, the highest level in almost a year, from 69.9 at the end of December.

The US is likely to outperform Europe and Japan this year, according to the IMF. The Fund this week kept its US forecast for 2012 unchanged at 1.8%. It predicted a 0.5% contraction in the 17-nation Euro area and a 1.7% expansion in Japan.

US Treasury Secretary Timothy F. Geithner, speaking in Davos said it is “realistic” to expect the US economy to grow about 2% to 3%, adding that “We still face tremendous challenges as a country.”

US consumer spending rose 2% in the fourth quarter, little changed from the 1.7% gain in the prior three months, Friday’s report showed. The median forecast of economists surveyed projected a 2.4%.

Spending rose 2.2% in 2011 after an increase of 2% in 2010, the weakest two-year performance of any expansion since World War II. Americans dipped into savings to finance their purchases. The savings rate decreased to 3.7%, the lowest level since the last three months of 2007, from 3.9% in the third quarter.