Economy grew 2.6% in the fourth quarter

The economy grew more slowly than expected in the fourth quarter as government spending fell sharply and business investment pulled back.

Gross domestic product expanded at a seasonally adjusted annual rate of 2.6% in the three months ended Dec. 31, slowing sharply from a robust 5% pace in the third quarter, the Commerce Department said Friday. Economists expected 3.1% growth.

For all of 2014, the economy grew 2.4%, up from 2.2% in 2013, after harsh winter weather early in the year caused the economy to shrink in the first quarter.

In the fourth quarter, consumer spending, which accounts for more than two-thirds of the economy, grew a healthy 4.3% as plunging gasoline prices and strong job growth bolstered Americans' confidence.

But government spending declined 7.5% as defense outlays tumbled after rising sharply in the third quarter.

Business investment increased just 1.9% as companies girded for a strengthening dollar and sluggish overseas growth that's expected to dampen exports, and energy companies grappled with plummeting oil prices.

Exports slowed as well, rising 2.8%, while imports increased sharply as the stronger dollar made foreign products less expensive for U.S. consumers. The widening trade gap subtracted from economic growth.

Despite the slowdown, many economists expect the economy to grow a solid 3% this year.

"With the collapse in energy prices increasing households' purchasing power, we expect strong consumption growth to continue driving GDP growth in the first half of this year," economist Paul Ashworth of Capital Economics wrote in a note to clients.

Recent reports have shown consumer spending rising solidly in the fourth quarter despite a slowdown in retail sales last month. Measures of business investment, however, have been declining.

In the third quarter, the economy expanded at its fastest pace in 11 years on stronger consumer and business spending and an unusual surge in national defense outlays.

Many economists expected growth to slow in the fourth quarter as military expenditures declined to a more typical level.