By Lucia Mutikani

WASHINGTON |
Fri Jan 27, 2012 9:59am EST

WASHINGTON (Reuters) – The U.S. economy grew at its fastest pace in 1-1/2 years in the fourth quarter of 2011, but a strong rebuilding of stocks by businesses and a slower pace of spending on capital goods hinted at softer growth early this year.

U.S. gross domestic product expanded at a 2.8 percent annual rate, the Commerce Department said on Friday, a sharp acceleration from the 1.8 percent clip of the prior three months and the quickest pace since the second quarter of 2010.

It was, however, a touch below economists’ expectations in a Reuters poll for a 3 percent rate, and nearly 2 percentage points was due to the build-up in business inventories.

The report supported the Federal Reserve’s ultra easy monetary policy stance to nurse the recovery.

“This seems consistent with the Fed’s view that the U.S. economy is going to need all the help it can get to hit escape velocity in the next couple years,” said David Watt, a senior currency strategist, RBC Capital, Toronto

U.S. stock index futures turned negative after the data, while government debt prices pared losses. The euro held gains against the dollar.

Growth in the fourth quarter got a temporary boost from the rebuilding of business inventories, which was the fastest since the third quarter of 2010, after they declined in the third-quarter for the first time since late 2009.

Inventories increased $56.0 billion, adding 1.94 percentage points to GDP growth. Excluding inventories, the economy grew at a tepid 0.8 percent rate, a sharp step-down from the prior period’s 3.2 percent pace.

The robust stock accumulation suggests the recovery will lose a step in early 2012.

Also pointing to slower growth, business spending on capital goods was the slowest since 2009, a sign the debt crisis in Europe was starting to take its toll.

Expectations of soft growth led the Fed on Wednesday to say it expected to keep interest rates at rock bottom levels at least through late 2014.

Fed Chairman Ben Bernanke said the central bank, which forecast growth this year in a 2.2 percent to 2.7 percent range, was mulling further asset purchases to speed up the recovery.

The Fed warned the economy still faced big risks, a suggestion the euro zone debt crisis could still hit hard.

The economy grew 1.7 percent in 2011 after expanding 3 percent the prior year.

“The Fed is attempting to shield the economy from a potentially more severe recession in Europe,” said Ryan Sweet, a

Article source: here

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