Roundup: U.S. economy slows to 2.6 percent in Q4 despite strong personal spending

U.S. real gross domestic product (GDP) retreated sharply to an annual rate of 2.6 percent in the fourth quarter of 2014 as slowing business investment and net exports offset strong personal spending.

The GDP expanded at an annual rate of 2.6 percent in the final three months, the U.S. Commerce Department said in an advance estimate released on Friday. That was below market expectation of around 3 percent and about half of the spectacular pace of the third quarter's 5 percent rate, the strongest in a decade.

The U.S. economy grew 4.6 percent in the second quarter after contracting in the first quarter of 2014. For the whole year, the economy expanded 2.4 percent, slightly higher than the 2.2 percent growth in 2013. The pace, however, was in line with the Federal Reserve's forecast of 2.3-2.4 percent growth for 2014.

According to the government data, the nonresidential fixed investment rose 1.9 percent in the fourth quarter, lower than the 8.9 percent growth in the previous quarter; real exports growth slowed to 2.8 percent from the third quarter's 4.5 percent increase; and the federal government spending dropped 7.5 percent in the fourth quarter, in contrast to an increase of 9.9 percent in the third quarter.

Despite the slower business investment, personal consumption, which accounts for more than two-thirds of U.S. economic activity, registered strong growth in October through December. The personal consumption expenditures advanced 4.3 percent in the quarter, the fastest since early 2006 and making positive contributions to the GDP growth.

"Consumption growth continues to trend upward as consumers economic optimism has reached its highest monthly level since 2004 and real wages have begun to rise," Jason Furman, chairman of the White House's Council of Economic Advisers, said in a statement on Friday.

The GDP report came two days after the Fed gave an optimistic assessment of the economy. The central bank said in its policy meeting statement released on Wednesday that despite weak global growth, the U.S. economic activity has been expanding at a solid pace, an upgrade from a "moderate pace" in its previous statement.

However, the weak global growth does begin to affect the Fed's policy making. It said in the statement that in determining how long to maintain the interest rate at near zero level, it will take into consideration of labor market conditions, inflation pressures and expectations, and financial and international developments. In its December statement, the Fed didn't include " international developments" in the clause.

Furman also noted the worries about the slow growth abroad, saying a continued slowdown in global growth would pose downside risks to U.S. net export growth.

Due largely to a sharp drop in oil prices since the summer, inflation remained muted in the fourth quarter and below the Fed's 2 percent target.

The personal consumption expenditures price index -- the Fed's preferred inflation measure -- fell at a 0.5 percent rate in the fourth quarter, the weakest reading since the first quarter of 2009. In the previous quarter, the index increased at an annualized 1.2 percent.

In its Wednesday statement, the Fed expected that the inflation will decline further in the near term, but stressed inflation will rise gradually toward 2 percent target over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.

Friday's GDP report is the government's first estimate of the fourth-quarter growth, and the figure will be revised twice in coming months as more data become available. Endite