U.S. economy up 3% in 4th quarter

Higher pay, saving, hiring could support solid growth

Most of the October-December quarter’s growth stemmed from the rebuilding of businesses’ inventories depleted last summer. While stockpiling is expected to slow, expansion is likely to continue.

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 businesses rebuilding inventories depleted last summer. Stockpiling is expected to slow sharply this quarter. And as it slows, economic growth could too. But economists emphasized that the fundamental drivers of the economy -- incomes, consumer spending, and business investment -- are rising and likely will 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 was revised Wednesday to show incomes grew much more than thought. After taxes, inflation-adjusted incomes rose 1.4 percent in the fourth quarter, 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 IHS Global Insight economist. Higher incomes should 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 reason for the higher growth estimate 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.

Data have made many analysts more optimistic about 2012. Firms stepped up hiring, pushing the unemployment rate down 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 Americans are ready to step up spending. Consumer spending accounts for 70 percent of economic activity.