The Commerce Department reported gross domestic product (GDP) grew at a 2.8 percent pace in the last three months of 2011, slightly less than expected but an increase over the prior quarter.
Economists expected a growth rate of about 3.1 percent in the fourth quarter, in part because of strong holiday shopping and car sales.
Real GDP, the output of goods and services produced in the U.S., increased at a revised annual rate of 1.8 percent in the third quarter. The Commerce Department's Bureau of Labor Statistics reported the disappointing figure ahead of the holiday shopping season on Dec. 22. Total economic activity produced in the U.S. is valued at about $14 trillion a year and consumption comprises two-thirds of total GDP.
Bill Stone, chief investment strategist for PNC Asset Management Group, had expected a "decent pace" of economic growth in the fourth quarter.
Stone said the contribution from consumption, which accelerated from third quarter growth, was encouraging. Though, again, it was below analysts' expectations. The deceleration in real final sales, or GDP less inventories, is an indicator that European economic woes are acting as a headwind for the U.S. economy, he said.
"The net result is that the results were lower than consensus and our expectations, so it will likely weigh on the markets today," Stone said.
The economy is expected to be a big issue in the presidential election in November, so the quarterly GDP reports will be watched closely. President Obama has argued that he inherited an economy in shambles and has been working to restore growth, while his Republican rivals have attempted to hang the country's economic woes on the president and the Democrats.
Political wrangling, the effects of the euro zone crisis, and fall-out from Japan's natural disasters contributed to a "generally awful" summer and early fall, said Leo Abruzzese, economist at the Economist Intelligence Unit.
Abruzzese said the country is unlikely to see another quarter "this good" any time soon because the last three months of last year were a "bounce-back period." The coming quarters are likely to settle into a more normal pace of 2 percent GDP growth.
"The recession in Europe and the slowdown in China and most other emerging markets will dent U.S. exports, which had been very strong," he said. "And there's still the risk that the euro zone will implode, which would drive the US back into a recession."
But he said the economy bounced back toward the end of the year.
Frank Fantozzi, president of Planned Financial Services, projects GDP to be around 2.25 percent to 2.5 percent for 2012.
The national unemployment rate fell to 8.5 percent, the lowest since February 2009. And U.S. retailers had a robust holiday season as consumers responded to deep discounts from Black Friday through the post-Christmas season.
Retail sales in December rose to $400.6 billion, an increase of 0.1 percent from November an 6.5 percent from December 2010, the Census Bureau reported earlier this month. December's retail sales were boosted in part by strong car sales in December.
U.S. sales of cars and light trucks rose 8.7 percent to over 1.2 million last month from December of 2010, according to Ward's Automotive Group. For the year, car sales rose 10.2 percent to over 12.7 million, Bloomberg reported.
Earnings season showed strength in the tech sector, with Apple Inc. reporting record earnings in its first quarter which ended Dec. 31. The financial sector took a beating in some areas, with the largest investment banks reporting lower bonuses for their employees. JPMorgan Chase, the biggest bank in the country, and Morgan Stanley reported lower earnings.
Instability in the U.S. economy is expected to continue.
The Federal Reserve's Federal Open Market Committee (FOMC) said it "expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually."
On Wednesday, the committee announced it is keeping the target range for the federal funds rate at zero to 1/4 percent, which has remained at a record low since the financial crisis began in 2008. The committee said economic conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
Stocks staged a sharp intra-day turnaround after the Federal Reserve provided another dose of accommodation by pushing out its rate hike timetable and signaling QE3, or quantitative easing monetary stimulus, may be in the cards, Fantozzi said.
"With four new members on the FOMC, Bernanke will have less push back if there is any extended downturn in the economy," he said.