WASHINGTON, Feb 27: US economic growth braked more sharply than initially thought in the fourth quarter amid a moderate increase in business inventories and a wider trade deficit, but strong domestic demand brightened the outlook.
Gross domestic product expanded at a 2.2 per cent annual pace, revised down from the 2.6 per cent pace estimated last month, the Commerce Department said on Friday. The economy grew at a 5 per cent rate in the third quarter.
Growth is poised to pick up in the first quarter now that the threat of an inventory overhang has diminished. However, an exceptionally cold and snowy February, as well as reductions in oil and gas drilling, could limit the pace of expansion.
"The composition of growth is looking much better, we are setting up for a solid quarter for the economy. The first quarter is still work in progress," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.
Businesses accumulated $88.4 billion worth of inventory in the fourth quarter, far less than the $113.1 billion the government had estimated last month.
That resulted in the GDP growth contribution from inventories being cut to one-tenth of a per centage point from 0.8 per centage point previously.
The moderate stock accumulation came as consumer spending grew at its quickest pace since early 2006.
With households bullish about the economy's prospects, thanks to a tightening labor market and lower gasoline prices, consumer spending is likely to remain at lofty levels this year.
A second report showed the University of Michigan's final February reading on the overall index on consumer sentiment was 95.4, higher than the initial reading of 93.6.
While that was a retreat from January's reading of 98.1, it was the second highest level since January 2007.
"A more confident consumer is likely to spend more on big ticket items and other discretionary items, and looking ahead, we expect consumer spending ... to outpace 2014," said Kristin Reynolds, an economist at IHS Global Insight in Lexington, Massachusetts.
First-quarter growth estimates currently range between a rate of 2.4 per cent and 3 per cent.
U.S. stocks were little changed, while prices for U.S. government debt rose. The dollar was flat against a basket of currencies.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down by one-tenth of a per centage point to a 4.2 per cent pace in the fourth quarter, still the fastest since the first quarter of 2006.
In another positive for the economy, business investment was not as weak as previously reported, with spending on equipment revised to show it rising at a 0.9 per cent rate instead of the previously reported 1.9 per cent contraction.
Growth in spending on intellectual products was the strongest since early 2000. All signs point to an acceleration in business investment in the first quarter, with data on Thursday showing a rebound in spending intentions in January after four straight months of declines. ?Reuters