After-tax income adjusted for inflation increased at a 0.8 percent annual rate in the final three months of 2011 after falling 1.9 percent in the prior period. For all of 2011, it fell 0.1 percent.
The savings rate decreased to 3.7 percent, the lowest levels since the last three months of 2007, from 3.9 percent in the third quarter.
Spending at retailers lost momentum each month in the fourth quarter, slowing from a 0.7 percent gain in October to a 0.1 percent increase last month. Merchants including Macy's Inc., Gap Inc. and Target Corp. cut prices to attract more business during the holiday shopping season.
Spending failed to meet expectations even as inflation took a smaller bite out of Americans' wallets. A measure of prices tied to consumer spending advanced at a 0.7 percent pace last quarter, down from 2.3 percent in the prior period and the smallest gain in more than a year. That compares with the Fed's long-run goal of 2 percent.
Government agencies also struggled last quarter as they cut spending at a 4.6 percent annual rate, the fifth straight decline. For all of 2011, government spending dropped 2.1 percent, the biggest decline since 1971.
Stockpiles were rebuilt at a $56 billion annual pace, adding 1.9 percentage points to growth.
Bright Spot
Business investment remained a bright spot. Corporate spending on equipment and software rose at a 5.2 percent annual rate last quarter. While down from the prior period's 16 percent gain, recent reports indicate it will probably rebound early this year.
Orders for durable goods like computers and machinery climbed more than forecast in December, a Commerce Department report showed yesterday.
The gain in orders at the end of 2011 "sets up a relatively firm trajectory" for investment, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a note.