US growth quickens in Q4, but speed-bumps ahead

"We're still repairing the damage done by the financial crisis. On top of that we face a more challenging world. We have a lot of challenges ahead in the United States," Geithner said.

Consumer spending, which accounts for about 70% of US economic activity, stepped to a 2% rate from the third-quarter's 1.7% pace - largely driven by pent-up demand for motor vehicles.

The Japanese earthquake and tsunami had disrupted supplies early in the year, leaving showrooms bereft of popular models.

Spending was also lifted by moderate inflation.

A price index for personal spending rose at a 0.7% rate in the fourth-quarter, the slowest increase in 1-1/2 years, after rising at a 2.3% pace in the July-September period.

A core inflation measure, which strips out food and energy costs, increased at a 1.1% rate after rising 2.1% in the third quarter.

The increase last quarter was the smallest in a year and put this measure well below the Fed's 2% target.

Sluggish income growth

Sluggish income growth amid an 8.5% unemployment rate, which has prompted households to tap savings and credit cards to fund their purchases, is expected to weigh on consumers as the new year unfolds.

The saving rate rose at a 3.7% rate in the fourth quarter, slowing from the prior period's 3.9% pace.

"Though the unemployment rate has improved, the jobs market remains a major challenge. Part of the decline in the unemployment rate is due to the fact that ... people have stopped looking for work," said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago.

"The high level of people out of the workforce and underemployed people show there isn't really much income generation to contribute to a better spending pattern."

About 23.7 million Americans are either out of work or underemployed.

The shrinking labor force suggests the economy's long-term growth potential has slipped below 2.5%.

A sustained growth pace of at least 3% would likely be needed to make noticeable headway in absorbing the unemployed and those who have given up the search for work.

Business spending grew at a sluggish 1.7%, pulling back sharply from the third-quarter's 15.7% pace.

Though exports held up despite slowing global demand, an increase in imports left a trade gap that sliced off 0.11 percentage point from GDP growth.

Despite an anticipated slowdown in growth this year, analysts do not believe the economy will fall into recession.

"The United States has enough momentum to offset the losses coming from Europe," said Laurenti.

Unseasonably mild winter weather helped home construction post its fastest growth pace since the second quarter of 2010, with much of the increase going to meet rising demand for rental apartments.

Spending on nonresidential structures fell. Government spending shrank for a fifth consecutive quarter, reflecting a large decline in defense and still weak state and local government outlays.