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Economy likely strengthened at end of last year, but many economists predict slowdown ahead
WASHINGTON (AP) ' A weak year for the economy likely ended on a hopeful note.
The economy likely grew at annual rate of 3 percent in the October-December quarter, according to a survey by FactSet. The Commerce Department will release the actual figure Friday.
The gain would represent modest improvement from this summer, when the economy grew just 1.8 percent. However, even with the strong finish, economists believe the economy expanded just 1.7 percent for the whole year ' roughly half the growth in 2010.
And growth is expected to slow in the first three months of this year. A key reason is wages have failed to keep pace with inflation. That will likely force many consumers to pull back on spending after splurging over the holidays.
Consumer spending is important because it makes up 70 percent of economic activity.
Businesses are also expected to reduce spending in the first quarter after building up their stockpiles in the final months of 2011.
Richard DeKaiser, a senior economist at Parthenon Group, expects just 2 percent annual growth in the January-March quarter. But Kaiser says that should be the weakest quarter. He expects the economy to gain strength in each quarter and grow 2.6 percent for the entire year.
The year is off to a good start. Companies invested more in equipment and machinery in December. The unemployment rate fell to 8.5 percent last month ' the lowest level in nearly three years ' after the sixth straight month of solid hiring.
People are buying more cars, and consumer confidence is rising. Even the depressed housing market has shown enough improvement to make some economists predict a turnaround has begun.
Still, many economists worry that a recession in Europe could dampen demand for U.S. manufactured goods, which would slow growth. And without more jobs and better pay, consumer spending is likely to stagnate.
The Federal Reserve signaled this week that a full recovery could take at least three more years. In response, it said it would probably not increase its benchmark interest rate until late 2014 at the earliest ' a year and a half later than it had previously said.
The central bank also slightly reduced its outlook for growth this year, from as much as 2.9 percent forecast in November down to 2.7 percent. The Fed sees unemployment falling as low as 8.2 percent this year.
DeKaiser said part of his optimism stems from a view that housing sales and prices will rise moderately this year. That should lift the battered construction industry, which ended last year with three months of gains in single-family home construction.
At the moment, housing remains the weakest part of the economy. New-home sales fell last month, and total sales for 2011 were the lowest on records dating back to 1963.
"I think the clouds will gradually lift over housing. Rising home prices will make consumers feel wealthier and this will translate into stronger consumer spending," DeKaiser said.