The U.S. economy likely expanded slightly in the fourth quarter as higher exports and a slump in oil imports narrowed the trade gap, suggesting a surprise drop in economic output reported last week was overstated.

America's trade deficit shrank in December to its narrowest point in nearly three years in December, the Commerce Department said on Friday.

That suggests trade added to economic growth in the final three months of last year, rather than holding it back as the government said last week when it estimated gross domestic product fell at a 0.1 percent annual rate.

The GDP report had shocked economists, who had been looking for the economy to expand at a 1.1 percent pace.

"Trade data for December paint a reassuring and encouraging picture of the U.S. economy at the end of last year," said Chris Williamson, chief economist at Markit.

A separate report from the Commerce Department showed wholesale inventories unexpectedly declined in December.

While the decline in inventories would subtract from GDP, economists said the drag was not big enough to offset the positive impact of December's trade performance.

Taken together, the reports pointed to an economy that was still growing at the end of the year, and was poised to grow at a quicker pace in early 2013 as firms rebuild inventories to keep up with demand.

Macroeconomic Advisers, a forecasting firm, said the data pointed to a growth rate of 0.5 percent in the fourth quarter.

JPMorgan economist Michael Feroli said the decline in inventories helped lead him to boost his forecast for first quarter GDP growth to a 1.5 percent annual rate - a still-tepid pace that would reflect the hit most Americans took in January from higher taxes. Feroli and other economists expect growth to pick up as the year progresses.

Prices for U.S. stocks rose as investors were impressed by a batch of strong trade data, which included readings showing stronger exports and imports by China during January as well as the U.S. figures for December. Prices for U.S. government debt fell.

IMPORTS DECLINE

The U.S. report showed the country's trade gap narrowed to $38.5 billion in December, which was a much smaller deficit than analysts polled by Reuters had expected.

U.S. exports increased $8.6 billion in December, boosted by sales of industrial supplies, including a $1.2 billion rise of non-monetary gold.

In a reflection of America's current oil and natural gas boom, petroleum exports rose by nearly $1 billion to a record high level.

A fall in petroleum imports led overall purchases from abroad to decline $4.6 billion in December. Both the price per barrel and volume of imports fell, although those data are not adjusted for seasonal swings.

For the entire year, the country's imports of crude oil fell to their lowest levels since 1997 in terms of volume.

For all of 2012, the U.S. trade gap fell by 3.5 percent to $540.4 billion as exports rose 4.4 percent. While trade was still a drag on the economy, rising exports made it less of a drag than in prior years.

While the overall deficit shrank last year, it grew with China, raising the hackles of U.S. manufacturers who feel Beijing gives its exporters an unfair edge by keeping its currency undervalued.

"Congress and the administration must take on currency manipulation," said Scott Paul, president of the Alliance for American Manufacturing

But even the figures on China had a silver lining. While U.S. imports last year from China increased to a record high, so did America's exports to the country.

America's December trade deficit with China for goods, which was not seasonally adjusted, narrowed by $4.5 billion on a drop in imports.