GDP growth of 2.6% falls short of Wall Street's target

BloombergThe U.S. economy just finished one of its strongest stretches of growth since an expansion begin in mid-2009

The numbers: Consumers and businesses powered the economy to a 2.6% rate of gross domestic product growth in the final three months of 2017. But declining inventories and a wider trade deficit kept the U.S. from hitting the 3% mark for the third quarter in a row for the first time in 13 years.

Economists surveyed by MarketWatch had forecast a 3% increase in GDP, the official scorecard for the U.S. economy.

For the full year, the U.S. expanded 2.3% vs. a 1.6% increase in 2016.

What happened: Consumer spending accelerated to a 3.8% annual pace of growth, the fastest pace in almost two years. Americans spent more on new cars and trucks, clothing and health care, among other things.

Businesses also got into the act. They increased spending on equipment by 11.4%, while investment in new housing jumped 11.6%.

Companies slowed production in the fourth quarter, however. The value of unsold goods, or inventories, fell by $29.3 billion. But even that might not be bad news. Companies may have sold more goods than expected in the holiday season, causing inventories to drop.

Read: Why the fourth-quarter GDP report can be called a 'good miss'

The once clear negative was a bigger trade deficit. Imports rose 13.9% -higher oil prices played a key role - to easily outpace a 6.9% increase in exports.

Reduced inventories and a big trade gap shaved 1.8 percentage points off fourth-quarter GDP. Growth would have topped 4% if they are excluded.

The annual rate of inflation, measured by the PCE index, rose to 2.8% in the fourth quarter - the highest pace since 2011. Yet inflation year over year was under 2% and less worrisome. The Federal Reserve is not under a lot of pressure to raise U.S. interest rates with inflation still relatively low.

The big picture: The U.S. economy just finished one of its strongest stretches of growth since an expansion begin in mid-2009, and there's reason to think it will continue. Consumer confidence is high, the unemployment rate is low and businesses are investing more.

Recently passed tax cuts for individuals and businesses are also expected to give the economy another shot in the arm in 2018.

What they are saying?: Mike Loewengart, vice president of investment strategy at E*Trade, said "2017 was one of the best economic runs in years" even though GDP failed to hit 3% for the third quarter in a row.

Market reaction: The Dow Jones Industrial Average DJIA, +0.85% and the S&P 500 SPX, +1.18% rose modestly in Friday trades. U.S. stocks have set record highs repeatedly over the last year.