The U.S. economy slowed less than expected in the fourth quarter amid solid consumer and business spending, leaving 2018 growth just shy of the Trump administration's 3% annual target.

U.S. GDP increased at a 2.6% annualized rate in the fourth quarter after expanding at a 3.4% pace in the July-September period. The fourth-quarter GDP report was delayed by a 35-day partial shutdown of the government that ended on January 25, which affected the collection and processing of economic data.

The Commerce Department said while it could not quantify the full effects of the shutdown, it estimated the partial closure had subtracted about one-tenth of a percentage point from fourth-quarter GDP growth through "a reduction in the labor services supplied by federal employees and reduction in intermediate purchases of goods and services by nondefense agencies."

Growth in consumer spending increased at a still strong 2.8% rate in the fourth quarter. Consumer spending grew at a robust 3.5% rate in the third quarter.

Trade tensions with China could constrain the economy for a while. U.S. Trade Representative Robert Lighthizer told lawmakers on Wednesday that Washington's issues with China were "too serious" to be resolved with promises from Beijing to buy more American goods and a threat of higher tariffs could loom over trade with China for years.

The trade dispute has combined with a strong dollar and weakening global demand to restrain export growth. It also led cautious businesses to hoard imports, causing the trade deficit to widen.

The trade shortfall subtracted 0.22 percentage point from fourth-quarter GDP growth after slicing off 2 percentage points in the July-September period. With consumer spending slowing, some of the imports probably ended up in warehouses.

This accelerated inventory accumulation, which offset some of the drag on GDP growth from the trade deficit.

Inventories increased at a USD 97.1 billion rate in the fourth quarter after rising at an USD 89.8 billion pace in the July-September quarter. Inventory investment added 0.13 percentage point to GDP growth last quarter after contributing 2.33 percentage points in the prior period.

Business spending on equipment accelerated in the fourth quarter from the prior period, growing at a 6.7% rate. It had slowed since the first quarter of 2018.

The market had forecast GDP rising at a 2.3% rate in the fourth quarter. Despite the economy's strong performance in the last quarter and in 2018, there are indications activity is softening, with most manufacturing measures weakening in January and February.

The labor market is also showing signs of cooling, with a report from the Labor Department on Thursday showing the number of Americans drawing unemployment benefits rising to a 10-month high in the week ended February 16.

The dollar reduced losses versus the euro on Thursday, after U.S. data showed that economic growth was stronger than expected in the fourth quarter. Prior to the data, the dollar index, a measure of the greenback's value against six major currencies, had fallen to a three-week trough. EUR/USD's upside bias is still in play as the market remains propped by the 30-day moving average, which is currently at 1.1364. Bulls now need to force a daily close above the 1.1403 Fibonacci level, which is a 50% retrace of the 1.1570 to 1.1235 (January to February) fall. The next resistance level is 1.1442 (61.8% Fibo).

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