The US economy grew at a faster-than-expected 5.7 per cent pace in the fourth quarter, the quickest in more than six years, as businesses made less-aggressive cuts to inventories and stepped up spending.
The robust performance closed out a year in which the economy contracted 2.4 per cent, the biggest decline since 1946.
After falling off a cliff at the start of the year, US gross domestic product turned higher in the third quarter, and the quickening fourth-quarter pace reported by the Commerce Department on Friday suggested a sustainable recovery was building.
"It's very solid and gives us a running start into the second half of the year when we can't rely on government stimulus," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
"That's part of the plan, to get us moving as fast as possible so when life support is removed we'll have a pulse."
US stocks opened higher on the surprisingly strong data, while Treasury debt prices deepened losses. US dollar rose against the yen. Economists had expected GDP to rise at a 4.6 per cent pace.
Growth in the fourth quarter was boosted by a sharp slowdown in the pace of inventory liquidation.
When businesses are selling off inventories, there is less of a need to step up production and it weighs on GDP. The slowing rate of inventory reduction in the fourth compared to the third quarter lifted GDP by nearly 3.4 percentage points.
It was the biggest percentage contribution inventories have made since the fourth quarter of 1987.
But even stripping out inventories, the economy expanded at an annual rate of 2.2 per cent, accelerating from the 1.5 per cent increase in the third quarter, reflecting relatively strong performance from other segments of the economy.
Consumer spending increased at a 2 per cent annual rate in the fourth quarter, contributing 1.44 percentage points to GDP. In the third quarter, consumer spending had risen at a 2.8 per cent pace, supported by the government's "cash for clunkers" program.
Business investment grew at at 2.9 per cent rate, the first increase since the second quarter of 2008, as the drag from the troubled commercial real estate was offset by robust spending on equipment and software.
The growth of spending on new home construction braked sharply in the fourth quarter to an annual rate of 5.7 per cent from an 18.9 per cent pace in the third quarter. Home building has received a lift from a popular tax credit for first-time buyers, but recent data have hinted at some weakness starting to creep in.
Export growth outpaced imports, narrowing the US trade gap and adding half a percentage point to GDP growth in the last quarter.
A separate report from the Labor Department showed employment costs rose 0.5 per cent in the fourth quarter, just a touch higher than analysts had expected.
Wages and salaries, which make up about 70 per cent of compensation, and benefits were both up 0.5 per cent, showing little inflation pressure arising from wages.
Reuters