Economy Expands 3.2% in Fourth Quarter

(GDP article updated with additional information)

NEW YORK ( TheStreet) -- The economy expanded at a faster pace in the fourth quarter, driven by higher exports and consumer spending, the government said early Friday.

According to an advance estimate from the Bureau of Economic Analysis , the U.S. gross domestic product or GDP grew 3.2% in the final quarter of the year, up from 2.6% in the third quarter.

Economists forecast economic growth at 3.5% according to Bloomberg, with estimates ranging from 2.9% to 5.4%. The advance estimate is, however, based on incomplete information. The government will release two more revisions to its estimates over the next two months.

A lower build up in private inventories acted as a drag on GDP. Private business inventories increased $7.2 billion in the fourth quarter, after increasing $121.4 billion in the third quarter.

On the flip side, real final sales of product, which excludes the impact of private inventories, jumped 7.1% in the fourth quarter compared with a 0.9% increase, suggesting strong trends in underlying demand.

Consumer spending, the biggest driver of the U.S. economy, rose 4.4% in the fourth quarter after rising 2.4% in the third. Durable goods saw the sharpest increase, up 21.6% in the fourth quarter after increasing 7.6% in the third.

Exports grew at a faster pace of 8.5% during the quarter, after jumping 6.8% in the third. Imports declined 13.6%.

The private sector appears to have played a bigger role in driving the economy in the fourth quarter with expenditures on both the federal and state level declining.

Real GDP grew 2.9% in 2010, as the U.S. economy emerged out of the recession. The recovery was, however, choppy with the economy slowing down sharply in the second quarter, triggering fears of a double-dip recession and prompting the Federal Reserve to embark on a $600 billion quantitative easing program.

Growth accelerated again in the third quarter as consumer spending and exports picked up. A strong holiday shopping season on higher consumer confidence revved up expectations for the fourth quarter.

The economy is still to recover at a pace that is fast enough to materially dent the high unemployment rate.

However, economists have a more optimistic outlook for 2011, with President Obama's $858 billion tax deal expected to stimulate business investment and consumer spending.

Inflation continues to be subdued according to data from the report. The Fed's preferred gauge of inflation, the personal consumption expenditure or PCE index rose at an annualized rate of 1.8% in the fourth quarter. Excluding food and energy, the index rose only 0.4% after rising 0.5% in the third quarter.

Stocks were mixed following the report. The SPDR Dow Jones Industrial Average ETF ( DIA) was up 0.07% in premarket trading, the SPDR S&P 500 ( SPY) was up 0.1% and the PowerShares QQQ ( QQQQ) was losing 0.05% in premarket trading.

-- Written by Shanthi Bharatwaj in New York

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