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(GDP report updated with additional information, analyst commentary)



) -- The government revised downwards its estimate for fourth quarter GDP, as state and local government spending fell more sharply than previously estimated and consumer spending grew less than previously forecast.

The Bureau of Economic Analysis said early Friday that the real gross domestic product - output of goods and services produced- increased at an annual rate of 2.8% in the fourth quarter of 2010. That was lower than its initial estimate of 3.2% and disappointed expectations for a sharper recovery. Economists were expecting the government to revise its estimate upwards to 3.4%, according to


The downward revision reflected an upward revision to imports and a downward revision to state and local government expenditures and personal consumption expenditure, which was partly offset by an increase in the estimate for exports.

Paul Ballew, economist at Nationwide Insurance, said the latest estimates confirmed that the recovery will be slow. "The recovery has a lot of weight on its back. It will be gradual and choppy," said Ballew, who expects the economy to grow at 3% to 3.2% in 2011. He said imbalances that triggered the recession would take a long time to correct. "We are still seeing a drag from housing. The residential sector typically contributes 10% to 12% of GDP. We are getting no contribution from that sector."

Real personal consumption expenditure, the biggest contributor to GDP, grew 4.1%, lower than previously estimated 4.4%. Still, it was the strongest growth in personal consumption since the first quarter of 2006. State and local government spending fell by 2.4%. The advance estimate showed only a 0.9% drop.

The report also revised downwards its estimates for real residential fixed investment to 2.8% from 3.4% previously.

Exports grew at a more rapid pace than previously thought, rising 9.6% versus 8.5% in the first estimate. Imports on the other hand fell 12.6%, less than previously thought.

Real final sales- which strips out changes in inventories- grew at 6.7% compared to 7.1% originally estimated.

Futures were relatively unchanged after the report. The market will likely interpret the weaker report as a sign that the

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will continue its easy money policy, better known as QE2.

According to Ballew, at the current rate of growth, payrolls will likely grow by 150,000 to 175,000 , below the 200,00 to 300,000 jobs required to meaningfully lower the unemployment rate, the main concern of the Fed.

--Written by Shanthi Bharatwaj in New York

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