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.
But with the labor market strengthening and some of the impediments to growth largely temporary, economists expect output to pick up in the first quarter of 2016. First-quarter growth estimates are for now mostly above a 2 percent rate.
"The economy took its lumps late last year. It's not going to be smooth sailing in 2016, but we don't see the ship sinking either, and the rising concern about a recession later on this year triggered by China, those fears need a reality check," said Chris Rupkey, chief economist at MUFG Union Bank in New York.
The Federal Reserve on Wednesday acknowledged that growth "slowed late last year," but also noted that "labor market conditions improved further." The U.S. central bank raised interest rates in December for the first time since June 2006.
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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.
While a separate report from the University of Michigan showed a dip in its consumer sentiment index in January because of the recent stock market sell-off, consumer optimism remained at levels consistent with steady economic growth.
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.
As oil prices appear to level off, the energy sector drag on the economy is expected to ease in the coming quarters. Oil prices have plummeted more than 60 percent since mid-2014, forcing oil field companies such as Schlumberger (SLB.N) and Halliburton (HAL.N) 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.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)
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