NEW YORK (Reuters) - The U.S. economy gathered speed in the fourth quarter, though a touch below expectations, with the biggest gain in consumer spending in more than four years and strong exports offering the clearest signals yet that a sustainable recovery is under way.
KEY POINTS: * The economy grew at a solid 3.2 percent annual rate in the final three months of 2010. * The rise was a touch below economists' expectations for a 3.5 percent rate.
GUY LEBAS, CHIEF FIXED INCOME STRATEGIST, JANNEY MONTGOMERY
"The headline number is a weaker-than-expected, but the mix is great. The core of the U.S. economic activity is moving along. Consumer spending really drove the results. The strong export to import ratio also helped. Total GDP should be in the 2.5 percent to 3.0 percent range in 2011.
"Initially we saw a bit of sell-off in bonds due to a knee-jerk reaction to the strong consumption reading. We have come back a bit on the tame inflation readings and employment cost index, which is the long-term indication of inflation trend. It implied very little cost pressure in the long term."
"A lot of it is a bounce back from net exports. The consumption is very strong, which is strongest so far we've seen the downturn. We ran down inventories. Business investments have hit their bottom. We have seen constructions completed, which is not a drag on growth. On the government side, there was also a bit of the drag.
"You should get out of bonds and get into equities. That's what you should do because it's a strong number even though it's not 3.5 percent consensus number.
"Businesses should get more comfortable with hirings with sustained growth rather worries over a double-dip recession which dominated much of last year."
JIM VOGEL, INTEREST RATE STRATEGIST, FTN FINANCIAL, MEMPHIS, TENNESSEE:
"As far as the market goes, traders have to digest the larger-than-expected personal consumption number. That's the most important question so far, and to determine the source of funding for that jump. It's a big question mark for the bond market and therefore a negative in that it raises more questions and there's a little more risk premium."
FRED DICKSON, CHIEF MARKET STRATEGIST, THE DAVIDSON COS., LAKE OSWEGO, OREGON:
"The 3.2 percent annual rate is exactly in line with the economic growth rate seen over the last 40 years. The conclusion is the economy appears to be self-sustaining. We would expect more estimates in the coming days. Investors should basically look at the economic growth rate at the end of the last quarter as a good jumping off point for further growth this quarter."
DAN GENTER, CHIEF INVESTMENT OFFICER, RNC GENTER CAPITAL MANAGEMENT, LOS ANGELES:
"We're clearly moving forward. We've built a base. We're coming out of the block, but like a 300-pound lineman, not like a sprinter. But the 300-pound lineman is jacked up on energy drinks from the Fed and they're going to keep feeding him."
"The economy steadily gained momentum in the second half of 2010, and is starting 2011 in reasonably good shape. When you have this level of sales without an increase in inventory, there is room for further room for increase in production.
"Virtually all measure of core inflation trended downward, reflecting the slack in the economy.
"We are finally seeing a meaningful impact from a weaker dollar affecting foreign trade performance. It also reflects a slower inventory building."
DAVID SLOAN, ECONOMIST WITH IFR ECONOMICS, A UNIT OF THOMSON REUTERS:
"While the advance estimate of Q4 GDP with a 3.2 percent annualized increase fell short of market expectations..., the disappointment was solely due to a sharp slowing in inventory growth. Final sales (GDP excluding inventories) surged by 7.1 percent, well above a consensus estimate of 5.3 percent, the strongest gain since Q2 1984, when President Reagan was proclaiming morning in America. While this breakdown could give some ammunition to the Fed hawks, doves may feel that a 3.4 percent rise in final sales to domestic purchasers may be more reflective of underlying demand, with a sharp fall in Q4 imports unlikely to be repeated."
MARKET REACTION: STOCKS: U.S. stock index futures turn positive BONDS: U.S. Treasury bond prices extend losses FOREX: The dollar trims losses versus yen