The economy grew more slowly in the fourth quarter than initially estimated as government spending shrank more sharply and consumer spending was less robust, a government report showed on Friday.

Gross domestic product grew at annualized rate of 2.8 percent, the Commerce Department said in its second estimate on Friday, marking a downward revision from its initial 3.2 percent estimate.

Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.3 percent pace. The economy expanded at a 2.6 percent rate in the third quarter.

Against the backdrop of surging crude oil prices and impending government budget cuts, the outlook for growth is looking less robust and some economists have lowered their forecasts for the first quarter.

Consumers stumbled a bit and while we expect them to pick up the pace in coming months, the recent rise in energy prices poses a notable headwind, said Michael Feroli, an economist at JP Morgan in New York.

JP Morgan cut its first quarter GDP growth estimate to 3.5 percent from 4 percent.

But Richmond Federal Reserve Bank President Jeffrey Lacker said on Friday that he did not think oil at $100 a barrel or gasoline over $3 a gallon would derail the U.S. economic recovery.

So far this seems quite manageable, he said on CNBC. The real danger is in inflation psychology. I think as long as expectations are managed well we're going to get through this without a burst in inflation.

And consumers, so far, appear to be weathering rising gasoline prices. Consumer confidence hit a three-year high in February, with the Thomson Reuters/University of Michigan survey's index on consumer sentiment climbing to 77.5 from 74.2 in January.

FED TO STAY THE COURSE

For the whole of 2010, the economy grew 2.8 percent instead of 2.9 percent.

The pace of growth in the fourth quarter was too slow to do much to lower the unemployment rate, which fell during the quarter from 9.6 percent to 9.4 percent. It fell again in January to reach 9 percent.

Federal Reserve officials have been concerned the economy is expanding too slowly to bring down unemployment significantly. The report supported the view the central bank will complete its $600 billion government bond-buying program to further stimulate demand by lowering interest rates.

Even within the current easy money environment, the economy continues to face the harsh reality of a weak housing market, rising commodity costs, and lackluster job creation, said Jim Baird, a partner at Plante Moran Financial Advisors in Kalamazoo, Michigan.

U.S. government debt prices were little changed, while the dollar rose against the euro.

The government revised fourth-quarter growth to reflect a steeper contraction in government spending than previously estimated. Government spending declined at a 1.5 percent rate rather than 0.6 percent, due to weak state and local government outlays, and subtracted 0.31 percentage points from GDP.

In addition, consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- grew at a 4.1 percent rate in the final three months of 2010 instead of 4.4 percent.

It was still the fastest since the first three months of 2006 and an acceleration from the third quarter's 2.4 percent rate. But there are concerns that surging crude oil prices could hurt consumer spending and slow the economy's recovery.

The government revised business investment up, though spending on equipment and software was lower. Business spending increased at a 5.3 percent rate instead of 4.4 percent.

Business investment grew at a 10.0 percent pace in the third quarter. Spending on software and equipment increased at a 5.5 percent rate instead of 5.8 percent.

Business inventories subtracted 3.70 percentage points from GDP growth, unrevised from last month. Business inventories increased $7.1 billion instead of the $7.2 billion estimated last month.

Excluding inventories, the economy expanded at a 6.7 percent pace rather than 7.1 percent. It still marked the biggest increase in domestic and foreign demand since 1998. In contrast, domestic purchases grew at a much more moderate 3.1 percent rate instead of 3.4 percent.

Exports were revised higher, but the upward revision to imports was even greater. Trade added 3.35 percentage points to GDP growth instead of 3.44 percentage points.

The report confirmed a pick-up in inflation pressures on surging food and gasoline prices. The personal consumption expenditures (PCE) index rose at an unrevised 1.8 percent rate in the fourth quarter. That was a sharp gain from 0.8 percent in the third quarter.

But a core price index closely watched by the Fed advanced at revised 0.5 percent rate instead of 0.4 percent. The increase, which matched the third quarter, was still the smallest rise on record.

(Reporting by Lucia Mutikani; Additional reporting by Emily Kaiser; Editing by Chizu Nomiyama)

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