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U.S. Economy Hit Brakes in Fourth Quarter, Growing Just 0.7 Percent

WASHINGTON - U.S. economic growth braked sharply in the fourth quarter as businesses stepped up efforts to reduce an inventory glut and a strong dollar and tepid global demand weighed on exports.

Gross domestic product increased at a 0.7 percent annual rate, the Commerce Department said on Friday in a report that showed a further cutback in investment by energy firms grappling with lower oil prices. Growth in consumer spending also slowed as unseasonably mild weather cut into spending on utilities.

The fourth-quarter growth pace was in line with economists' expectations and followed a 2 percent rate in the third quarter. The economy grew 2.4 percent in 2015 after a similar expansion in 2014. Excluding inventories and trade, the economy grew at a 1.6 percent pace in the fourth quarter.

U.S. Treasury debt prices fell slightly after the report, while the dollar held gains vs. a basket of currencies. U.S. stock index futures were up marginally.

The Federal Reserve on Wednesday acknowledged that growth "slowed late last year," but also noted that "labor market conditions improved further."

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"To the extent that much of this slowdown could be attributed to the drag coming from the adverse global headwinds, strong dollar and the prolonged inventory correction, the Fed is likely to take some solace in the encouraging signs of continued strength in the domestic-facing side of the economy," said Millan Mulraine, deputy chief economist at TD Securities in New York.

The U.S. central bank raised interest rates in December for the first time since June 2006. Though the Fed has not ruled out another hike in March, financial markets volatility could see that delayed until June.

In the fourth quarter, businesses accumulated $68.6 billion worth of inventory. While that was down from $85.5 billion in the third quarter, it was a bit more than economists had expected, suggesting inventories could remain a drag on growth in the first quarter.

The small inventory build subtracted 0.45 percentage point from the first estimate of fourth-quarter GDP growth.

Consumer spending cools

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.2 percent rate. Though that was a step-down from the 3.0 percent pace notched in the third quarter, the gain was above economists' expectations.

Unusually mild weather hurt sales of winter apparel in December and undermined demand for heating through the quarter.

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With gasoline prices around $2 per gallon, a tightening labor market gradually lifting wages and house prices boosting household wealth, economists believe the slowdown in consumer spending will be short-lived.

Income at the disposal of households after accounting for taxes and inflation increased 3.2 percent in the fourth quarter after rising 3.8 percent in the prior period. Savings rose to a lofty $739.3 billion from $700.6 billion in the third quarter.

The dollar, which has gained 11 percent against the currencies of the United States' trading partners since last January, remained a drag on exports, leading to a trade deficit that subtracted 0.47 percentage point from GDP growth in the fourth quarter.

The downturn in energy sector investment put more pressure on business spending on nonresidential structures. Spending on mining exploration, wells and shafts dropped at a 38.7 percent rate after plunging at a 47.0 percent pace in the third quarter.

Investment in mining exploration, wells and shafts fell 35 percent in 2015, the largest drop since 1986.

Oil prices have dropped more than 60 percent since mid-2014, forcing oil field companies such as Schlumberger and Halliburton to slash their capital spending budgets.

Business spending on equipment contracted at a 2.5 percent rate last quarter after rising at a 9.9 percent pace in the third quarter. Investment in residential construction remained a bright spot, rising at a 8.1 percent rate.

With consumer spending softening, inflation retreated in the fourth quarter. A price index in the GDP report that strips out food and energy costs increased at a 1.2 percent rate, slowing from a 1.4 percent pace in the third quarter.