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A worker walks through the "Action Alley" at a new Wal-Mart store in Chicago, in this January 24, 2012 file photo. (JOHN GRESS/REUTERS)
A worker walks through the "Action Alley" at a new Wal-Mart store in Chicago, in this January 24, 2012 file photo. (JOHN GRESS/REUTERS)

U.S. economy expands by 3% in fourth quarter Add to ...

The U.S. economy expanded as expected in the fourth quarter while personal income grew at a much faster pace than previously thought, which should help underpin spending this quarter.

Gross domestic product increased at a 3.0 per cent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said in its final estimate on Thursday, unrevised from last month’s estimate.

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That was in line with economists’ expectations. The economy grew at a 1.8 per cent rate in the third quarter.

However, personal income was $13.162-trillion (U.S.) at a seasonally adjusted annual rate, $3.3-billion more than previously reported. Disposable income was $10.6-billion more than previously thought, likely reflecting the strengthening labor market.

Gross domestic income, which measures output from the income side, increased at a 4.4 per cent rate - the fastest since the first quarter of 2010 - from a 2.6-per-cent rise in the third quarter.

The department also said after-tax profits increased at a 1.1-per-cent rate, slowing from 2.7 per cent the prior quarter. The slowdown in profits reflects the increase in wage costs as companies step up hiring.

Rising incomes should help to cushion consumer spending against surging gasoline prices. Spending, which accounts for about 70 per cent of U.S. economic activity, grew at an unrevised 2.1-per-cent pace in the fourth quarter.

While the economy grew solidly in the final three months of 2011, momentum has slowed this quarter amid signs of cooling in manufacturing, business spending and a pause in the housing market recovery - even as the labor market strengthens.

Federal Reserve Chairman Ben Bernanke this week said growth needed to accelerate to bring the unemployment rate down further. While he offered no sign that the U.S. central bank would launch a third round of bond purchases or quantitative easing, Bernanke said all options remained on the table.

First-quarter growth is seen around 2 per cent, also as the economy loses the boost from restocking by businesses. However, rising gasoline prices are a wild card.

So far there is little sign that consumers have cut back, with auto sales surging in both January and February.

The build-up in business inventories accounted for the bulk of the rise in output in the last quarter. But the final GDP revisions showed a slightly better tone in the overall growth picture.

Business spending was revised up to a 5.2 per cent growth rate from 2.8 per cent, to account for slightly stronger investment in equipment and software. That offset weaker export growth.

There were also small upward revisions to spending on home building projects. Though home sales stumbled in February, the housing market is slowly recovering and homebuilding is expected to contribute to growth this year for the first time since 2005.

While the rebuilding of inventories added a hefty 1.81 per centage points to GDP in the last quarter, the pace of accumulation was not as fast as previously reported. Business inventories increased $52.2-billion, instead of $54.3 billion.

Excluding inventories, the economy grew at an unrevised 1.1 per cent rate. That was a sharp step-down from the prior period’s 3.2 per cent pace.

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