But so far, the economy is showing signs of holding its own against the fiscal drag.

Employers have added an average of 200,000 jobs a month since November. That helped lower the unemployment rate in February to 7.7 percent, a four-year low.

Economists expect similar job gains in March, in part because a measure of unemployment benefit applications fell this month to a five-year low.

Sales of previously occupied homes rose in February to the highest level in nearly three years, while builders broke ground on more houses and apartments. Annual home prices jumped in January by the most since June 2006, according to a closely watched measure.

Stock prices have surged. On Wednesday, the Standard & Poor's 500 index was within two points of its all-time high.

All of that is making consumers feel wealthier, which could lead to more spending. Consumer spending drives 70 percent of economic activity.

The Federal Reserve still thinks the economy needs aggressive measures to bolster growth. Last week it stood by its plan to keep a key short-term interest rate near zero until unemployment drops below 6.5 percent. The Fed also left unchanged its plan to keep buying $85 billion in bonds until it sees a substantial improvement in the job market.

The slowdown in business inventories trimmed 1.5 percentage point from growth in the fourth quarter and the reductions in defense spending cut another 1.3 percentage point from growth.

Consumer spending was growing at a 1.8 percent rate in the fourth quarter, slightly better than the 1.6 percent increase in the third quarter but down from last month's estimate that consumer spending was growing by 2.1 percent.

That revision was offset by upward revisions in business investment spending on structures and equipment and by stronger sales of U.S. exports.

The government first estimated two months ago that the economy had contracted at an annual rate of 0.1 percent in the fourth quarter, a decline that was erased by the revisions.

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