By Lucia Mutikani
WASHINGTON (Reuters) - U.S. economic growth unexpectedly slowed in the fourth quarter as the strongest pace of consumer spending in three years resulted in a surge in imports.
Gross domestic product expanded at a 2.6 percent annual rate also restrained by a modest pace of inventory accumulation, the Commerce Department said in its advance fourth-quarter GDP report on Friday. That followed a 3.2 percent growth pace in the third quarter.
Imports, which subtract from GDP growth, increased at their fastest rate in more than seven years. Rising imports underscore the challenges that the Trump administration faces in its quest to boost annual GDP growth to 3 percent.
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A measure of domestic demand jumped at a 4.6 percent rate, the quickest since the third quarter of 2014, highlighting the economy's strength. Final sales to private domestic purchasers rose at a 2.2 percent pace in the third quarter.
Strong domestic demand is part of a synchronized global rebound that includes the euro zone and Asia. Demand has also been buoyed by President Donald Trump's promise of hefty tax cuts, which was fulfilled in December when the Republican-controlled U.S. Congress approved the largest overhaul of the tax code in 30 years.
Economists polled by Reuters had forecast the economy growing at a 3.0 percent pace in the final three months of 2017.
The economy grew 2.3 percent in 2017, an acceleration from the 1.5 percent logged in 2016. Economists expect annual GDP growth will hit the government's 3 percent target this year, spurred in part by a weak dollar, rising oil prices and strengthening global economy.
While the corporate income tax rate has been slashed to 21 percent from 35 percent and taxes for households have also been lowered, economists see only a modest boost to GDP growth as the fiscal stimulus is coming at a time when the economy is almost at full employment.
Prices for U.S. Treasuries pared losses after the data, while the dollar was little changed at lower levels. U.S. stock index futures were trading higher.
ROBUST CONSUMER SPENDING
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.8 percent rate in the fourth quarter. That was the quickest pace since the fourth quarter of 2014 and followed a 2.2 percent rate of growth in the July-September quarter.
Consumer spending is likely to remain supported by rising household wealth, thanks to the stock market rally and higher house prices, tax cuts and firming wage growth as companies compete for workers and some states raise the minimum wage.
Declining savings, however, are a concern. Savings fell to $384.4 billion from $478.3 billion in the third quarter. The saving rate dropped to 2.6 percent from 3.3 percent in the prior period.
The burst in consumer spending was satiated with imports, which grew at a 13.9 percent pace in the fourth quarter, the fastest since the third quarter of 2010, offsetting a rise in exports, which is being driven by dollar weakness.
As a result, trade sliced off 1.13 percentage points from GDP growth last quarter, the most in a year, after adding 0.36 percentage point in the third quarter. Inventory investment also restrained GDP growth in the fourth quarter, subtracting 0.67 percentage point from output after adding 0.79 percentage point to output in the prior period.
With consumer spending accelerating, inflation perked up in the fourth quarter. The Federal Reserve's preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, rose at a 1.9 percent rate. That was the quickest pace in more than a year and followed a 1.3 percent pace of increase in the third quarter.
Signs of rising inflation together with a tightening labor market could put the Fed on a more aggressive path of interest rate increases than is currently being anticipated, economists say. The unemployment rate dropped seven-tenths of percentage point last year to a 17-year low of 4.1 percent.
The U.S. central bank has forecast three rate hikes this year, the same number as in 2017.
Business investment in equipment grew at an 11.4 percent rate, the quickest since the third quarter of 2014 and picking up from the third-quarter's 10.8 percent pace. While spending on equipment is likely to be underpinned in 2018 by the corporate income tax cuts and recent gains in crude oil prices, there are signs that the momentum is slowing.
A second report from the Commerce Department on Friday showed orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, fell 0.3 percent in December, the first drop in six months.
Investment in homebuilding rebounded after contracting for two straight quarters. Government spending increased at a solid 3.0 percent, the fastest pace since the second quarter of 2015. That followed the July-September period's pedestrian 0.7 percent growth pace.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)