Gross domestic product climbed at a seasonally adjusted 3.5% annual rate October through December, the Commerce Department said Wednesday in its first of three readings on fourth-quarter GDP. That was up from 2% in the third quarter. A price inflation gauge within the report posted its biggest drop in 52 years.

For the whole year, GDP, which acts as a scoreboard for the economy by measuring all goods and services produced, advanced 3.4%, compared to a 3.2% increase in 2005 and 3.9% growth in 2004.

The 3.5% fourth-quarter increase not only defied original expectations but even surpassed economists' raised forecasts, prompted by some encouraging data in the past few weeks.

The median estimate of 22 economists surveyed Monday by Dow Jones Newswires called for 3.0% growth.

Economists elevated their forecasts for the economy as the fourth quarter wore on and data trickled in suggesting surprising strength in areas such as retail sales and payroll employment.

At the top of the quarter, some analysts had thought GDP would rise around 1% in the three-month period. Each subsequent morsel of positive news eroded hopes for an interest-rate cut by the Federal Reserve.

Held back by the housing slump, the economy grew just 2.0% in the third quarter and when policy makers last met, on Dec. 12, estimates for the fourth quarter were largely below that rate.

Wrapping up a two-day meeting Wednesday, bankers were expected to leave their federal-funds rate untouched for a fifth straight session at 5.25%. The central bank is expected to issue its decision at 2:15 ET.

Inflation gauges within the GDP report indicated prices softened significantly during the fourth quarter. The government's price index for personal-consumption expenditures actually fell, slipping by 0.8% after rising 2.4% in the third quarter and 4.0% in the second quarter.

The decrease was the biggest since 1.2% in third-quarter 1954.

The PCE price gauge excluding food and energy rose 2.1%, after increasing 2.2% in the third quarter. The price index for gross domestic purchases, which measures prices paid by U.S. residents, inched 0.1% higher, after going up 2.2% in the third quarter.

The chain-weighted GDP price index increased 1.5%, after rising 1.9% in the third quarter.

Analysts have said lower energy costs helped the economy in the fourth quarter, giving consumers more money to spend.

Consumer spending accounts for about 70% of GDP and Wednesday's data showed it surged 4.4% October through December, after increasing 2.8% in the third quarter.

Spending contributed 3.05 percentage points to GDP; it had contributed 1.96 percentage points in the third quarter.

Purchases of durable goods rose 6.0% in the fourth quarter, after increasing by 6.4% July through September. Fourth-quarter nondurables spending rose by 6.9%. Services spending climbed 2.9%.

International trade also gave a push to the economy at the end of last year, contributing 1.64 percentage points to GDP. U.S. exports rose by 10.0% and imports decreased 3.2%.

In the third quarter, trade reduced GDP by 0.19 percentage point; exports in that period were 6.8% higher and imports rose by 5.6%.

Despite lower energy prices, fourth-quarter business spending fell 0.4%. Investment in structures went up 2.8% but equipment and software fell 1.8%. Overall third-quarter outlays by businesses climbed 10.0%.

Residential fixed investment, which includes spending on housing, fell by 19.2%; that was the sharpest drop since 21.7% in first-quarter 1991 and it reduced overall GDP by 1.16 percentage points.

Third-quarter spending fell 18.7%. Sales of new homes tumbled in 2006, forcing builders faced with rising inventories to offer incentives in order to move property.

Another drag on GDP growth was less investment in inventories. Motor vehicle production declined, following weak sales coupled with high energy prices. Stockpiles of all goods rose by $35.3 billion.

Companies had boosted stocks $55.4 billion in the third quarter and $53.7 billion in the second quarter. The deceleration robbed October-December GDP of 0.71 percentage point.

Real final sales of domestic product, which is GDP less the change in private inventories, increased at a 4.2% annual rate in the fourth quarter. Third-quarter sales advanced by 1.9%.

Federal government spending increased 4.5%, after rising in the third quarter by 1.3%. State and local government outlays rose 3.3%, after going up by 1.9% in the third quarter.

_{(Fuente: Cortesía SEI Compass)}