The U.S. economy grew at a stunning 5.8 percent annual rate during the final three months of 1999, chalking up a year of remarkable prosperity as the nation heads into its longest economic expansion in history. That was stronger than the 5.1 percent rate many analysts were forecasting.

For all of 1999, the nation's gross domestic product — the total output of goods and services — increased by 4 percent, turning in three straight years where growth was 4 percent or higher, the Commerce Department said Friday.

Meanwhile, the Labor Department said its closely watched Employment Cost Index (ECI), which gauges what employers pay workers in wages, salaries and benefits, rose 1.1 percent in the October-December quarter, up from a 0.8 percent gain in the third quarter.

For the entire year, labor costs increased 3.4 percent, matching the rate of growth in 1998.

"These numbers show there is some wage pressure bleeding through from the tight labor market, but we expect the Fed (Federal Reserve) to stay with a gradual approach to raising rates," said Mitch Stapley, chief fixed income officer at Kent Funds in Grand Rapids, Mich.

Wall Street Waits For Next Week's Meeting

Wall Street widely expects the Fed's policymaking committee, which meets on Tuesday and Wednesday, to push up the 5.5 percent federal funds rate on overnight bank lending to 5.75 percent.

One of the Fed's chief concerns is an acceleration of wage inflation from a tight labor market coupled with strong consumer demand. The ECI is closely watched by Fed Chairman Alan Greenspan for hints of rising wage inflation.

Greenspan, in an appearance before Congress this week, pledged to do the best he can to keep the economic expansion going. The economy is about to enter its 107 month of uninterrupted growth in February, surpassing the 106-month record set in 1969.

Economy Too Hot to Cool Without Rate Hike

Even though the Fed raised rates three times last year, the economy continues to grow at a rapid pace that some economists fear cannot be sustained without later triggering inflation.

For instance, workers' wages and salaries increased 0.9 percent in the last quarter, matching the increase in the third quarter.

It was higher benefit costs which drove up the overall ECI. Benefit costs were up 1.3 percent, stronger than the 0.8 percent gain measured in the prior period. That the biggest rise since the January-March quarter of 1993, when benefit costs rose 1.5 percent.

"The benefits component was the big surprise. Paid leave and contract signing bonuses seem to have driven that higher," said Steve Ricchiuto, chief U.S. economist at ABN AMRO Inc. in New York.

Meanwhile, an inflation gauge tied to GDP rose 1.5 percent in 1999, a worse showing on inflation than the 0.7 percent increase recorded the year before. In the fourth quarter, the inflation measure rose 2.3 percent, up from 1.7 percent posted in the third quarter.

Consumer Spending Driving Strong Economy

The booming U.S. economy has been powered by consumer spending, which accounts for two-thirds of all economy activity.

The government said today that consumer spending rose at an annual rate of 5.3 percent in the fourth quarter and 5.3 percent for the year. Plentiful jobs, low inflation and stock and bond market gains have made Americans feel wealthy and put them in the mood to spend.

Meanwhile, the nation's savings rate — savings as a percentage of disposable income — was pulled to a record quarterly low of 1.9 percent in the fourth quarter from 2.1 percent in the previous quarter. For all of 1999, the savings rate hit an all-time annual low of 2.4 percent. In 1998, the savings rate was 3.7 percent.

Businesses — confident that consumers will keep spending — increased their stockpiles to $65.4 billion in the fourth quarter, up from $38 billion in the third quarter.

Business investment — spending on new equipment and plants — rose at an annual rate of 2.5 percent in the fourth quarter, down from a 10.9 percent rate in the third quarter. For the year, business investment increased 8.3 percent, compared with 12.7 percent in 1998.

Housing construction, meanwhile, fell by a 1.2 percent rate in the fourth quarter, following a 3.8 percent rate of decline in the previous quarter, reflecting the steady rise in mortgage rates. In 1999, housing construction rose 7.2 percent, but was down from a 9.2 percent increase the year before.

The U.S. trade deficit continued to be a drag on the nation's economic growth. Imports rose at a 10.6 percent rate in the fourth quarter while exports grew by a 6.9 percent rate. For the year, imports shot up 11.8 percent and exports rose 3.5 percent.

The trade deficit subtracted 1.11 percentage points from growth in 1999, a slight improvement from the 1.18 percentage-point reduction recorded in 1998. The U.S. trade deficit is the one blot on an otherwise vibrant economy.

Even though overseas' demand for U.S. products is picking up, U.S. manufacturers continue to feel the lingering effects of the global financial crisis that struck in 1997 and severely depressed foreign demand for U.S. goods.

— The Associated Press and Reuters contributed to this report