The recession-stricken U.S. economy expanded slightly in the fourth quarter of 2001, the government said on Wednesday in a report that could add to beliefs a recovery is under way.

Gross domestic product, the broadest gauge of the economy's health, increased 0.2 percent in the final three months of last year, the Commerce Department said.

That defied predictions from private economists that GDP would shrink by 1 percent and bolstered expectations that Federal Reserve policymakers will leave interest rates unchanged at 40-year lows when they wrap up a two-day meeting later on Wednesday.

President Bush said he was pleased by the GDP report but was still concerned about the economy and wanted Congress to pass an economic stimulus package.

"Today's GDP report is positive, but we cannot take growth and job creation for granted," Bush said in a statement. "For the sake of America's workers, I call on Congress to pass an economic security package that will protect American jobs and prosperity because I remain concerned about the economy."

A surge in consumer spending on cars and the biggest increase in government spending in 15 years powered the fourth quarter GDP. Amid the strong consumer spending, companies ran through a whopping $120.6 billion worth of inventories, the largest drop on record.


Even though the economy has been in recession since March, the downturn has been unusually mild by historical standards. The only negative quarter for GDP occurred in the third quarter, when it contracted 1.3 percent.

GDP during all of 2001 grew 1.1 percent, the weakest performance since a 0.5 percent decline in 1991 in the midst of the last recession a decade ago.

But the current recession is likely to turn out to be one of the mildest downturns of any of the 10 since the end of World War II.

"We are well-positioned for recovery here. We almost have to look back and call this a recession-ette, rather than a recession,'' said Diane Swonk, chief economist at Bank One in Chicago.

"It will be very interesting to see Fed's decision today, which may include them standing pat in terms of no move on interest rates, and there is chance here they will now talk about risks being balanced between recession and recovery.''

The mildness of the recession in terms of lost output is little comfort, however, to the 1.4 million Americans who have lost jobs since the slump began in March.

Recognizing this political reality, President Bush in his first State of the Union address Tuesday night pledged to wage war on recession, challenging Congress to pass his proposed extended unemployment benefits and tax cuts to spur business investment.

However, Bush's campaign for increased stimulus was dealt a setback last week when Federal Reserve Chairman Alan Greenspan cast doubt on the need for the plan, given the growing signs that the economy was close to mounting a recovery.

The official arbiter, the National Bureau of Economic Research, will determine when the recession is over. In November, the panel of academic economists announced that the recession, which ended a record 10-year expansion, had begun in March.

While the traditional definition of a recession is two consecutive quarters of declining GDP, the NBER uses several monthly statistics to better pinpoint the economy's exact turning points.

More Evidence of Recovery

The GDP report came only a day after orders for expensive manufactured goods rose a more-than-expected 2 percent in December while consumer confidence improved again.

The numbers suggest better days may be ahead for the nation's battered manufacturing sector.

The Commerce Department said orders for durable goods — items intended to last three years or more — rose 2.0 percent to $176.4 billion in December, after a revised 6.0 percent decline in November. November's drop was initially reported as 4.8 percent.

The gain in orders for the month was stronger than the 1.3 percent increase forecast by economists in a Reuters poll.

Meanwhile, the New York-based Conference Board said Tuesday that its Consumer Confidence Index rose to 97.3 this month from a a revised 94.6 in December. That was much better than the 96 reading analysts were expecting.

The industry group's index, based on a monthly survey of some 5,000 U.S. households, is closely watched because consumer confidence drives consumer spending, which accounts for about two-thirds of the nation's economic activity.

"While the economy has not turned around yet, the worst may well be over," said Lynn Franco, director of the Conference Board's Consumer Research Center.

Reuters and the Associated Press contributed to this report.