US economic growth slowed sharply in the fourth quarter of 2014 as weak business spending and a wider trade deficit offset the fastest pace of consumer spending since 2006. 

US gross domestic product expanded at a 2.6% annual pace after the third quarter's spectacular 5% rate, the Commerce Department said in its first GDP snapshot today. 

The slowdown, which follows two back-to-back quarters of very strong growth, is likely to be short-lived given the enormous tailwind from lower petrol prices. 

Most economists believe fundamentals in the US are strong enough to cushion the blow on growth from weakening overseas economies. 

Even with the moderation in the fourth quarter, growth remained above the 2.5% pace, which is considered to be the economy's potential.

Economists had expected the economy to expand at a 3% rate in the fourth quarter.   
        
For all of 2014, the economy grew 2.4% compared to 2.2% in 2013. 

Meanwhile consumer spending, which accounts for more than two-thirds of US economic activity, advanced at a 4.3% pace in the fourth quarter - the fastest since the first quarter of 2006 and an acceleration from the third quarter's 3.2% pace.

Lower gasoline prices - they are down 43% since June, according to government data - and a strengthening labour market are fuelling a surge in optimism among households.

The University of Michigan's consumer sentiment rose to 98.1 this month, the best reading since January 2004, from 93.6 in December.

The data came two days after the Federal Reserve said the economy was expanding at a "solid pace," an upgraded assessment that keeps it on track to start raising interest rates this year. 

The US Fed has kept its short-term interest rate near zero since December 2008 and most economists expect a mid-year lift-off. 

Consumer spending, which accounts for more than two-thirds of US economic activity, advanced at a 4.3% pace in the fourth quarter - the fastest since the first quarter of 2006 and an acceleration from the third quarter's 3.2% pace.

According to US government data, petrol prices have plunged 43% since June, leaving Americans with more money for discretionary spending. A strengthening labour market, despite sluggish wage growth, is also a boost. 

The strong pace of consumer spending, however, was overshadowed by a drop in capital expenditure. Business spending on equipment fell at a 1.9% rate - the largest contraction since the second quarter of 2009. 

Business spending on equipment had advanced at an 11% pace in the third quarter.

Last quarter's weakness could reflect cuts or delays in undertaking investment projects by companies in the oil industry. But it could also be payback after two back-to-back quarters of robust gains. 

A wider trade deficit, as slower global growth curbed exports and solid domestic demand sucked in imports, subtracted 1.02 percentage point from GDP growth in the fourth quarter. Trade had added 0.78 percentage point to third-quarter growth. 

Restocking by US businesses to meet growing demand contributed 0.82 percentage point to fourth-quarter GDP. 

Other details of the report were mixed. Government spending was a drag as a defence-driven investment burst faded. Residential construction made a mild contribution to GDP growth. 

With petrol prices plummeting, a key measure of inflation fell 0.5%, the weakest reading since the first quarter of 2009.