WASHINGTON (Reuters) - U.S. economic growth at the close of 2006 was revised up, according to a government report on Thursday that identified rising stocks of unsold goods as a key reason and cast a shadow over future prospects.
The Commerce Department said gross domestic product, measuring total goods and services output within U.S. borders, grew at a 2.5 percent annual rate instead of the 2.2 percent reported a month ago, up from 2 percent in the third quarter.
Separately, Labor Department data showed new jobless claims unexpectedly fell 10,000 last week to a seasonally adjusted 308,000, offering no sign that companies are trying to trim payrolls.
Stock prices were helped by the signs of stronger growth and a durable jobs market. The Dow Jones industrial average .DJI was up 48.39 points to close at 12,348.75 while the Nasdaq Composite Index .IXIC was up less than 1 point to close at 2,417.88.
Some of the positive effect was dampened by a pickup in oil prices as a verbal dispute over the Iranian seizure of 15 British sailors and marines grew more heated.
Bonds were lower across the board as investors felt reduced jobless claims offset signs of weakness and reduced chances for a reduction in official interest rates before the second half. The bellwether 10-year U.S. Treasury bond was down 5/32s of a point and yielded 4.65 percent.
The GDP report showed inventories rose more than first thought at the end of last year, which could lead businesses to hold back future production. In addition, spending on new-home building plunged again and investment by businesses softened more than thought earlier.
“The (GDP) headline number looks better, but the gut of the report is a little worse,” said Robert Brusca, chief economist for Fact and Opinion Economics in New York. “Going forward, we still don’t know, but you should be disturbed by the lack of capital spending.”
Business investment spending fell at a 3.1 percent annual rate in the fourth quarter rather than the 2.4 percent decline the government estimated a month ago. That contrasted with a 10 percent third-quarter jump.
Spending on new-home building plummeted at a 19.8 percent rate — steeper than the 19.1 percent fall estimated a month ago — after an 18.7 percent drop in the third quarter.
It was the fifth quarter in a row that residential spending has fallen and the steepest since a 21.7 percent plunge in the first quarter of 1991 when the economy was on the brink of recession.
The housing sector is under mounting pressure as problems with mortgage lending accumulate, though policy-makers insist its problems should not spill over into the broader economy.
Speaking in Dayton, Ohio, on Thursday, Minneapolis Federal Reserve Bank President Gary Stern described the economy as “anything but fragile” and said the worst of the housing slump already has passed.
Many analysts forecast that GDP growth will ease to a 2 percent rate or less in the current quarter, which ends March 31. During all of last year, GDP expanded 3.3 percent — topping 3 percent for the third year in a row after growth of 3.2 percent in 2005 and 3.9 percent in 2004.
There was a significant downward revision in spending on equipment and software, which dropped at a 4.8 percent annual rate in the fourth quarter instead of 3.2 percent. That was the biggest decline since 4.9 percent in the fourth quarter of 2002 and a sharp turnaround from the third quarter when equipment and software spending grew at a 7.7 percent rate.
Companies added to inventories at a $22.4 billion annual rate in the closing quarter of 2006 rather than the $17.3 billion rate it reported a month ago and that was the main reason for the upward revision in fourth-quarter GDP.
A price gauge favored by the Federal Reserve — personal consumption expenditures excluding food and energy items — advanced at a slightly slower 1.8 percent annual rate in the fourth quarter instead of the 1.9 percent estimated a month ago and was down from 2.2 percent in the third quarter.
Fed Chairman Ben Bernanke, testifying before Congress on Wednesday, said potential inflation remains the U.S. central bank’s primary policy concern. He also said problems in the mortgage lending business are “likely to be contained” rather than cause widespread economic distress.
On Wednesday, the Commerce Department said orders for long-lasting durable goods rose 2.5 percent in February, only partly recovering from a 9.3 percent plunge in January. Softer orders potentially foreshadow a lingering reluctance by businesses to invest in more production machinery that, in turn, could act as a drag on overall growth in 2007.
Additional reporting by Gilbert Le Gras