The U.S. economy grew at its strongest rate in 2-1/2 years during the first three months of this year, snapping back from a lackluster fourth quarter on a surge in spending and investment, a Commerce Department report on Friday showed.

Gross domestic product grew at a 4.8 percent annual rate in the January-March first quarter, more than twice the 1.7 percent rate in the fourth quarter and the strongest for any three months since 7.2 percent in the third quarter of 2003. The first-quarter figure was only slightly below the 4.9 percent rate that Wall Street economists had forecast.

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The pace of price rises declined from the fourth quarter. A gauge of personal spending excluding food and energy - a measure favored by the Federal Reserve - advanced at a 2 percent rate in the first quarter compared with 2.4 percent in the fourth quarter last year.

First-quarter GDP performance was boosted by increased government spending on reconstruction in the wake of last year's devastating hurricanes on the Gulf Coast. Federal government spending shot up at a 10.8 percent rate, a sharp contrast to the 2.6 percent rate of decline in the fourth quarter. It was the strongest government spending since a 22.1 percent jump in the second quarter of 2003.

Federal Reserve Chairman Ben Bernanke told the Joint Economic Committee on Thursday that growth was likely to moderate as the year wears on, partly because of some softness in housing markets. He also indicated that U.S. central bank policy-makers might pause fairly soon in a campaign of steady rate rises, which have brought 15 interest-rate hikes since mid-2004.

Businesses robustly boosted their investment during the first quarter, with spending rising at a 14.3 percent annual rate. That was three times the 4.5 percent fourth-quarter increase and was the largest in nearly six years, since a 14.8 percent climb in the second quarter of 2000.

Spending on equipment and software alone increased at a 16.4 percent rate in the first quarter - the strongest in six years - after a 5 percent fourth-quarter rise. The strong spending implies that corporations remain optimistic about their sales prospects and are willing to make the investments to expand their businesses.

With demand strong, inventories grew at a slower rate in the first quarter. Stocks of unsold goods increased at a $21.9 billion rate, down from $37.9 billion in the final three months last year, leaving room for factories to keep churning out more goods as long as spending remains hearty.

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