March 26, 2010 / 12:33 PM / 10 years ago

Economic growth revised slightly lower in Q4

WASHINGTON (Reuters) - The U.S. economy grew at a slightly less brisk pace in the fourth quarter than previously estimated and the momentum is expected to slow this year as a boost from inventories fades.

Robert Stoler works to remove graphite and other impurities from a small gold ingot while refining recycled jewelry at Dvir & Stoler Refining in New York March 25, 2010. REUTERS/Lucas Jackson

While the report on Friday — which also showed continued strength in corporate profits — was evidence the economy emerged from recession in the second half of 2009, underlying growth was not robust enough to cut high unemployment.

Separately, worries about jobs kept consumer confidence unchanged this month from February.

“We are still in a lukewarm expansion and underlying growth excluding inventory accumulation really needs to accelerate if we are going to get the jobless rate down in a reasonable period of time,” said Zach Pandl, U.S. economist at Nomura Securities International in New York.

Gross domestic product — which measures total goods and services output within U.S. borders — expanded at a 5.6 percent annual rate, the Commerce Department said in its final report for the fourth quarter, instead of 5.9 percent as it had previously estimated.

That was below market expectations for a 5.9 percent rate, but remained the fastest pace since the third quarter of 2003.

Although an alternative measure of growth, gross domestic income, or GDI, increased for the first time since the first quarter of 2008, analysts said it did not alter their views of slow labor market recovery.

GDI measures the economy’s performance from the income side. It surged at a 6.2 percent rate after falling 0.4 percent in the third quarter.

“It’s encouraging because it means companies are well positioned to expand and increase their workforces if they wanted to, but there are lot of obstacles to that, the economic outlook itself and the low capacity utilization,” said Harm Bandholz, an economist at Unicredit Research in New York.

With the unemployment rate at 9.7 percent, the labor market is the Achilles heel of the economy’s recovery from its worst downturn since the 1930s.

That is casting doubts over the durability of the recovery, making businesses reluctant to hire new workers even as their profits continue to grow.

After-tax corporate profits grew 6.5 percent in the fourth quarter, slowing from a 12.7 percent rise in the prior period, but were 22.8 percent higher compared to the last three months of 2008.

U.S. stocks earlier rose as a standby aid package announced by euro zone leaders eased worries about Greece’s debt problems. They ended little changed after the sinking of a South Korean naval ship. The dollar fell against the euro, while U.S. government debt prices rose.


The government’s final estimate of fourth-quarter GDP growth was reduced from the prior reading because contributions from business investment, consumer spending and inventories were found to be lower than earlier thought.

Much of the economy’s recovery has been driven by government stimulus and businesses being less aggressive in reducing inventories. The growth pace is expected to slow in the coming quarters as the boost from these two sources fades.

“Solid, if lackluster, growth in consumer spending and robust growth in both capital spending on equipment and exports will help to keep growth in the 2.5 percent to 3 percent range in the next few quarters,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington in Massachusetts.

The Thomson Reuters/University of Michigan’s Surveys of Consumers index was unchanged at 73.6 in March on job worries, but a touch above market expectations for 73.

However, the labor market is slowly improving and payrolls are expected to have increased in March, which would mark only the second time since the recession started in December 2007.

A preliminary Reuters survey forecast the closely watched employment report due next Friday to show employers added 190,000 jobs after cutting 36,000 positions in February, largely driven by hiring for the 2010 census.

Excluding inventories, GDP grew at a rate of 1.7 percent instead of the 1.9 percent pace previously estimated.

When businesses increase inventories or slow the rate at which they are liquidating them, manufacturers raise production and this boosts GDP. Business inventories fell $19.7 billion in the fourth quarter, slightly more than the $16.9 billion estimated last month.

Inventories dropped $139.2 billion in the July-September period. The change in inventories added 3.79 percentage points to GDP in the last quarter. This was the biggest percentage contribution since the fourth quarter of 1987.

For the whole of 2009, the economy contracted 2.4 percent, the biggest decline since 1946, the department said. Growth in business investment was trimmed to reflect reduced spending on structures. Commercial real estate is struggling under the weight of high vacancy rates and tight access to credit.

Still, businesses lifted spending on equipment and software at the fastest pace since the fourth quarter of 1998.

Companies have been stepping up investment in software and on Friday, Oracle Corp ORCL.O issued its strongest sales forecast in more than a year.

Spending on new home construction was revised lower in the fourth quarter and sales of new homes have slowed this quarter, hitting a record low in February.

The rise in consumer spending was adjusted lower to a 1.6 percent rate from 1.7 percent.

Additional reporting by Ellen Freilich in New York; Editing by Andrew Hay

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