WASHINGTON (BLOOMBERG) - The US economy expanded at a slower-than-projected pace in the fourth quarter on drags from trade and inventories, offsetting strength in consumer spending and business investment that signals solid momentum entering 2018.

Gross domestic product rose at a 2.6 per cent annualised rate after 3.2 per cent in the prior period, Commerce Department data showed Friday (Jan 26). The median forecast in a Bloomberg survey called for 3 per cent. Consumer spending, the biggest part of the economy, rose 3.8 per cent, the best in more than a year. Business equipment investment grew at the fastest pace in three years.

While the report dashed expectations for the longest streak of 3 per cent-or-better growth since 2005, a key measure of underlying demand delivered the strongest performance since 2014 and inflation picked up, which will help keep the Federal Reserve on track to raise interest rates in coming months.

President Donald Trump's move to cut taxes may give the economy an additional boost in 2018, though reaching his goal of sustained 3 per cent GDP growth will prove challenging, in part because household purchases are projected to cool.

Weak productivity and slow labour-force expansion will also pose hurdles in the longer term, and higher borrowing costs could crimp gains as well.

"The economy's performance over the course of 2017 has been more mixed than overwhelmingly positive," Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note before the report.

Still, "economic momentum will remain strong, and may accelerate further, in 2018."

Fourth-quarter GDP was dragged down mainly because the trade deficit widened, as imports rose at double the pace of exports.

Net exports subtracted 1.13 percentage points from GDP growth, the most in a year. A change in inventories subtracted 0.67 percentage point, the most since early 2017.

For a better sense of underlying domestic demand, economists look at final sales to domestic purchasers, which strip out inventories and trade, the two most volatile components of GDP.

Such sales grew 4.3 per cent last quarter, the most since 2014, after a 1.9 per cent increase.

For the full year, GDP, the value of all goods and services produced, grew 2.5 per cent in the fourth quarter from a year earlier, the Commerce Department report also showed.

On that basis, it was the strongest annual performance since 2014's 2.7 per cent. The expansion is now in its ninth year and is poised to become the country's second-longest on record later in 2018.

Fourth-quarter GDP growth forecasts ranged from 2.2 per cent to 3.8 per cent, according to the Bloomberg survey.

Household purchases, which account for about 70 per cent of the economy, were projected to rise 3.7 per cent, according to the survey median. The latest gain in consumer spending added 2.58 percentage points to growth.

Another standout was corporate demand. Business equipment investment expanded at a 11.4 per cent annualised rate after a 10.8 per cent gain in the prior period. That added 0.62 percentage point to fourth-quarter growth.

The economy also got a boost from housing for the first time in three quarters. Residential construction increased at a 11.6 per cent annualised rate, contributing 0.42 percentage-point to growth.

While the boost from tax cuts and a strong labour market may provide support to the economy, growth may be less robust. GDP gains are projected to cool to 2.5 per cent as early as this quarter, according to economists' forecasts compiled by Bloomberg.

One reason is that household spending will be hard pressed to accelerate further.

Wage gains remain tepid even with steady hiring and the lowest unemployment rate since 2000. Gasoline expenses are ticking up, consumer debt is rising, and borrowing costs are projected to keep rising gradually as the Fed tightens monetary policy.

First-quarter GDP has also been limited in recent years by so- called residual seasonality, or quirks in the data that the government is trying to address.

A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.9 per cent annualised pace after a 1.3 per cent increase.

Nonresidential fixed investment - which includes spending on equipment, structures such as office buildings and factories, and intellectual property - increased 6.8 per cent and added 0.84 percentage point to growth.

Amid post-hurricane rebuilding efforts, government spending rose at a 3 per cent pace, the most since 2015, adding 0.5 percentage-point to GDP growth; state and local outlays increased 2.6 per cent, while spending by federal agencies grew 3.5 per cent.

After-tax incomes adjusted for inflation climbed at a 1.1 percent annual rate; the saving rate decreased to 2.6 per cent.

The GDP estimate is the first of three for the quarter, with revised figures scheduled for February and March when more information becomes available.