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Faster growth last quarter bolsters hopes for 2012

In this Feb. 19, 2012 photo, a long line 2012 Cruze sedans sit at a Chevrolet dealership in the south Denver suburb of Englewood, Colo. The economy grew at a slightly faster pace in the final three months of last year, and Americans earned more income than previously reported. That could set the stage for stronger growth this year. In this Feb. 19, 2012 photo, a long line 2012 Cruze sedans sit at a Chevrolet dealership in the south Denver suburb of Englewood, Colo. The economy grew at a slightly faster pace in the final three months of last year, and Americans earned more income than previously reported. That could set the stage for stronger growth this year. (AP Photo/David Zalubowski)
By Christopher S. Rugaber
AP Economics Writer / February 29, 2012
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WASHINGTON—Stronger hiring and higher pay and savings should support solid growth for the economy in coming months.

That was a key message that emerged Wednesday from a report on economic growth in the final three months of 2011. The economy grew at a 3 percent annual rate in the October-December quarter, up from a previous estimate of 2.8 percent, the Commerce Department said.

Most of last quarter's growth stemmed from a jump in company restocking. That happened because businesses rebuilt inventories that had been depleted last summer. Stockpiling is expected to slow sharply this quarter. And as it slows, economic growth could, too.

But economists stressed that the fundamental drivers of the economy -- incomes, consumer spending and business investment -- are rising. They will likely sustain modest growth this year.

Expectations for growth this quarter are slightly better than they were a month ago. Economists expect the economy to expand at a roughly 2 percent annual pace in the current quarter and about 2.5 percent for the full year, according to the National Association for Business Economics. That would be faster than last year's 1.7 percent growth.

In its first report in January on fourth-quarter growth, the government had estimated that incomes rose only slightly. That estimate was revised Wednesday to show incomes grew much more than previously thought.

After taxes, inflation-adjusted incomes rose 1.4 percent in the fourth quarter. That's nearly double the first estimate.

And in the third quarter, incomes rose 0.7 percent, compared with earlier estimates of a 1.9 percent drop.

Economists had worried that growth wouldn't be sustainable without more income gains. Wednesday's report showed that households were in better financial shape than many had expected.

Some economists detect signs of a self-fulfilling cycle in which more jobs fuel more spending and pay, which spark further hiring and spending.

"Today's figures give encouraging evidence of a virtuous cycle developing where incomes and consumption move up together," said Nigel Gault, an economist at IHS Global Insight.

Higher incomes should also make it easier for consumers to absorb higher gas prices and keep spending on other items.

"The consumer is in a better position to weather higher gasoline prices than appeared to be the case prior to these revisions," said Joshua Shapiro, chief economist at MFR Inc., in a note to clients.

A big reason for the higher estimate of growth in the October-December quarter was that consumers and businesses spent more than first thought.

Imports, which subtract from the gross domestic product, rose by a smaller amount. GDP is the broadest measure of the nation's output of goods and services.

The savings rate was revised higher. Americans saved 4.5 percent of their incomes in the October-December quarter. That was down slightly from the third quarter. But it topped the previous 3.7 percent estimate for the fourth quarter.

Consumer spending rose 2.1 percent in the fourth quarter, powered by a jump in spending on autos and other long-lasting goods. That's an improvement from the third quarter. And it's much better than spending during the spring, when high gas prices nearly brought consumer spending to a standstill.

Growth would have been stronger last quarter if not for a steep drop in government spending. Cuts in federal defense spending, along with reduced spending at the state and local levels, shaved nearly a full point off growth.

A host of recent data has made many analysts more optimistic about this year's prospects. Companies have stepped up hiring, pushing the unemployment rate down for five straight months to 8.3 percent.

U.S. factories boosted output last month, and December was their strongest month of growth in five years. Consumer confidence rose to its highest point in a year this month, the Conference Board reported Tuesday. That could signal that Americans are ready to step up spending. Consumer spending accounts for about 70 percent of economic activity.

Some trends likely to slow growth in the current quarter are still good for consumers. The warm winter weather will likely mean Americans won't have to spend as much to heat their homes.

Still, growth could be held back this year by rising gas prices, which have jumped 30 cents in the past month. That forces consumers to spend more for the same amount of gas and leaves less money for other purchases. A sharp rise in gas prices early last year helped slow the economy to a near-standstill.

But so far, higher gas prices aren't enough to cause a repeat of last year's setback, economists say. With hiring accelerating and incomes higher, consumers are better able to pay the higher prices.

In addition, last year, the prices of other goods, particularly food and energy sources such as natural gas, also jumped. But natural gas costs have plummeted recently. And food prices are rising much more slowly. Those trends should offset some of the squeeze on spending from pricier gas.

The government makes three estimates of the gross domestic product for each quarter. GDP includes everything from autos to utility output to haircuts. Each revision is based on more complete economic data.

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