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Jan 30, 11:11 AM EST

US economy slowed last quarter, but signs are pointing up


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WASHINGTON (AP) -- The U.S. economy slowed in the final three months of 2014, but a burst in consumer spending and the prospect of continued low energy prices are bolstering confidence that growth will strengthen this year.

The economy, as measured by the gross domestic product, grew at a 2.6 percent annual rate in the October-December period, the government said Friday. That was down from a sizzling 5 percent gain in the previous quarter.

Though business investment, government spending and trade weakened, consumers signaled rising confidence by stepping up their spending at the fastest rate in nearly nine years. Thanks to steady job growth, tumbling oil prices and signs that pay may finally be picking up, Americans appear poised to keep the economy expanding at a solid pace. On Friday, the University of Michigan reported that its index of sentiment showed that U.S. consumers are more confident than they have been since January 2004.

Also Friday, the government said wages and benefits are ticking up, a sign that steady job gains may be compelling employers to pay a bit more. An index that measures pay and benefits rose 2.2 percent in 2014, up slightly from 2 percent in 2013 and ahead of inflation, which rose 1.3 percent.

Though the overall GDP figure for last quarter was mildly underwhelming, many of the components of the report were consistent with an economy that's outpacing others around the world and is on course to post solid growth this year.

Paul Ashworth, chief U.S. economist at Capital Economics, said the fourth quarter's slowdown is "nothing to worry about."

Ashworth noted that the result was heavily influenced by a swing in the volatile defense spending category. He pointed to the acceleration in consumer spending as more indicative of where the economy is headed.

"With the collapse in energy prices increasing households' purchasing power, we expect strong consumption growth to continue driving GDP growth in the first half of this year," Ashworth said.

For 2014 overall, the economy grew a moderate 2.4 percent. The year began on a sour note as a brutal winter sent the economy into reverse. GDP dropped at a 2.1 percent annual rate in the first quarter. But the economy rebounded, with growth averaging a 4.1 percent annual rate over the next three quarters.

Many analysts expect growth above 3 percent this year. That would mark a significant acceleration after a prolonged period of weakness. Since the recession ended in 2009, the economy's expansion has averaged 2.2 percent a year, far below the gains typical after a deep recession.

In the October-December period, consumer spending - which accounts for roughly 70 percent of the economy - grew at a 4.3 percent rate, up from 3.2 percent in the third quarter. It was the best gain for consumer spending since the first three months of 2006.

But business investment in equipment shrank after big increases in the previous two quarters. Economists partly blamed the weakness on cutbacks in oil and gas drilling by energy companies grappling with the plunge in energy prices.

Government spending fell at a 2.2 percent annual rate after a 4.4 percent gain in the third quarter. The third quarter had been bolstered by a 16 percent rise in defense spending, which backpedaled last quarter.

Trade reduced growth by a full percentage point in the fourth quarter. Business stockpiling added 0.8 percentage point.

The government's estimate of GDP - the total output of goods and services - was the first of three for the October-December quarter.

Even with the fourth quarter slowdown, the U.S. economy is still the star of the global economy. Europe is battling renewed weakness, Japan is in a recession, and even growth in China slowing.

Last week, the International Monetary Fund cut its outlook for global growth over the next two years, warning that weakness in most major economies will trump lower oil prices. But the IMF increased its outlook for the U.S. economy, pegging growth this year at 3.6 percent. If that forecast proves accurate, it would mark the fastest annual U.S. growth in over a decade.

"It took us awhile to get here, but I think the economy is finally off and running," said Mark Zandi, chief economist at Moody's Analytics. "Businesses are hiring aggressively, and the big drop in gas prices means that people have more money to spend on other items."

Global oil prices have fallen nearly 60 percent in seven months, with the nationwide average for gasoline now around $2 a gallon. That decline translates into a savings for consumers of about $175 billion, Zandi said.

"A big part of growth this year will be people spending their gas savings," he said.

The Federal Reserve on Wednesday took note of the brightening economic picture while pledging to remain "patient" in deciding when to begin raising interest rates from record lows.

The Fed has leeway to be patient because the weaker global economy has helped strengthen the dollar against other countries, and gasoline prices are plunging. Both developments are helping to hold down already-low inflation.

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