Economy grows at 3.1 percent rate at end of 2010

The U.S. economy grew a little faster at the end of 2010 than the government had previously estimated, boosted by more inventory building and business investment in plants and equipment.

But rising oil prices will likely limit growth this year.

The economy, as measured by the gross domestic product, grew at an annual rate of 3.1 percent in the October-December quarter, the Commerce Department reported Friday. That represents an upward revision from last month's 2.8 percent estimate for the same period.

The quarterly expansion was the best since the start of last year and was driven by 4 percent growth in consumer spending, the strongest gains in four years. Consumer spending is closely watched because it accounts for 70 percent of economic activity.

But many economists say a jump in oil prices has likely cut into that spending and slowed growth in the current January-March quarter.

"Higher oil prices are going to put a bit of a squeeze on consumers," said Nariman Behravesh, chief economist at IHS Global Insight.

There is also a concern that the Japanese crisis will disrupt factory production there. That could slow activity at some U.S. companies that rely on Japanese manufacturers for parts, especially in the U.S. auto and electronics industries.

The new uncertainty has led many economists to trim their growth estimates for the current quarter. There is a wide range of estimates, from 2.3 percent to 3.8 percent.

Economists say growth needs to average around 5 percent for a year just to lower the current 8.9 percent unemployment rate by 1 percentage point.

In the final three months, residential construction grew at an annual rate of 3.3 percent after plunging at a 27.3 percent rate in the July-September quarter. However, there is concern about the prospects for housing given recent weakness in home sales and construction.

Government spending was shrinking at a rate of 1.7 percent in the final three months of last year. State and local governments are struggling to get budget deficits under control.

Economic growth of 3.5 percent this year would still be the best performance since 2004. Last year, the economy grew 2.9 percent following a 2.6 percent drop in 2006. That had been the biggest decline in more than six decades.

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