As a result, the economy grew only 1.6 percent in 2016, the weakest pace since 2011. Growth last year was constrained by cheap oil and a strong dollar, which hurt company profits and undercut business investment.

An inventory correction also eroded growth. Those impediments to growth are mostly out of the way. The economy expanded 2.6 percent in 2015.

In the fourth quarter, exports fell at a 4.3 percent rate, reversing the 10 percent increase notched in the third quarter. The fourth-quarter drop in exports was the biggest since the first quarter of 2015.

Trade sliced off 1.70 percentage points from GDP growth in the fourth quarter after adding 0.85 percentage point in the prior period. That was the biggest drag since the second quarter of 2010. Most of the hit came from soybean exports, which fired up GDP growth in the third quarter after a poor soy harvest in Argentina and Brazil.

Economists polled by Reuters had forecast GDP rising at a 2.2 percent rate in the fourth quarter.

Prices for U.S. government debt rose and U.S. interest rates futures turned flat after the data. U.S. stock index futures pared gains while the dollar fell against the euro and yen.



With a labor market at or near full employment starting to lift wages and supporting consumer spending, the outlook for the economy is fairly bright. Growth this year could also get a boost from President Donald Trump's pledge to increase infrastructure spending, cut taxes and reduce regulations.

Although Trump has offered little detail on his economic policy, his promises have been embraced by consumers, businesses and investors. Consumer and business confidence have soared, while the U.S. stock market has rallied to record highs.

But uncertainty over the Trump administration's trade policy poses a risk to the economy.

A stronger economy would also mean further interest rate increases from the Federal Reserve. The U.S. central bank has forecast three rate hikes this year. It raised its benchmark overnight interest rate in December by 25 basis points to a range of 0.50 percent to 0.75 percent.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.5 percent rate in the fourth quarter. It rose at a 3.0 percent pace in the third quarter.

Income at the disposal of households increased 3.7 percent in the fourth quarter after a robust 4.1 percent rise in the prior period. Savings dipped to $791.2 billion from $818.1 billion in the third quarter.

With domestic demand increasing steadily, businesses continued to restock. They accumulated inventories at a rate of $48.7 billion in the last quarter, up from $7.1 billion in the third quarter. Inventories added 1.0 percentage point to GDP growth, double the contribution in the third quarter.

Business investment shifted into higher gear, with spending on equipment increasing at a 3.1 percent rate after four straight quarterly declines. The gain reflects a surge in gas and oil well drilling, in tandem with rising crude oil prices.

Spending on mining exploration, wells and shafts increased at a 24.3 percent rate after declining at a 30.0 percent pace in the third quarter. Energy services firm Baker Hughes said last Friday that U.S. energy companies added 29 oil rigs in the week to Jan. 20, bringing the total count to 551 - the most since November 2015.

Investment in nonresidential structures, however, fell at a 5.0 percent pace in the fourth quarter after rising at a 12.0 percent rate in the prior period.

Investment in home building rebounded after two straight quarterly declines, contributing to growth. Government spending picked up as a rise in state and local government investment offset a decline in federal government expenditures.

By Lucia Mutikani - Reuters (Editing by Paul Simao)