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US GDP grows at 5.7 pct pace in Q4, fastest in 6 yrs

WASHINGTON - The U.S. economy grew at its fastest pace in more than six years in the fourth quarter, surprising economists, as businesses curbed their aggressive efforts to cut stocks and stepped up spending.

In its first estimate, the Commerce Department said on Friday that gross domestic product expanded at a 5.7 percent annual rate. The robust performance closed out a year in which the economy contracted 2.4 percent, the biggest fall since 1946.

After dropping off a cliff at the start of the year, U.S. GDP turned higher in the third quarter. The quickening fourth quarter pace was driven by firms not cutting inventories as deeply as before, rather than a surge in domestic demand.

But it pointed to a sustainable recovery at a crucial time before government stimulus plans run out.

“The data shows that the necessary transition from government stimulus to private sector spending is underway, which is essential to sustain the economic expansion,” said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.

U.S. stocks initially rallied on the eye-catching growth number. They were flat by early afternoon as worries about fiscal troubles buffeting Europe offset the GDP report. Prices for government bonds fell and the dollar rose.

The benchmark S&P 500 .SPX> had dropped around 6 percent from its 15-month closing high of Jan. 19 as investors worried about restrictions on banks proposed by the Obama administration.

Getting the economy on a sustainable growth track remains one of the key challenges facing President Barack Obama, who on Wednesday outlined a raft of measures to create jobs and nurture the recovery.

The brightening economic picture was further enhanced by a jump in Midwest business activity in January to its high level in four years while consumer confidence perked up.

Economists said they expected the lift from inventories to fade over time, with economic growth moderating in the second half of the year.

“The economy’s engine is running, but to some degree we’re still in a ditch spinning our wheels. With fiscal and monetary fuel running out, we need job growth to get us firmly on the road to recovery,” said Bill Cheney, chief economist at John Hancock Financial in Boston.

Inventories boost growth

The slowing rate of inventory reduction in the fourth compared to the third quarter lifted GDP by nearly 3.4 percentage points, the biggest contribution inventories have made to GDP growth since the fourth quarter of 1987.

When businesses sell off inventories, there is less of a need to step up production and it weighs on GDP. With the liquidation rate slowing, GDP was lifted.

But even with inventories stripped out, the economy expanded at an annual rate of 2.2 percent, accelerating from the 1.5 percent increase in the third quarter. That reflected relatively strong performance from other segments of the economy, particularly business investment.

Still, this measure of final demand is meager compared with most normal recoveries, implying the Federal Reserve can bide its time before raising interest rates.

Consumer spending increased at a 2 percent annual rate, contributing 1.44 percentage points to GDP. In the third quarter, consumer spending had risen at a 2.8 percent pace, supported by the government’s “cash for clunkers” program.

Business investment grew at at 2.9 percent rate, the first increase since the second quarter of 2008, as the drag from the troubled commercial real estate was offset by robust spending on equipment and software.

“The solid increase in investment in equipment and software, if confirmed, might indicate that a more solid recovery is under way,” said Harm Bandholz, an economist at UniCredit Research in New York. Some economists said it suggested a budding confidence that could lead to hiring.

The first GDP estimates are based on incomplete data and will get revised, as was the case with third quarter growth, which was initially projected at a 3.5 percent rate. The latest third quarter reading was 2.2 percent.

The growth of spending on new home construction braked sharply in the fourth quarter to an annual rate of 5.7 percent from an 18.9 percent pace in the third quarter.

Home building has received a lift from a popular tax credit for first-time buyers, but recent data have hinted at some weakness starting to creep in. Export growth outpaced imports, narrowing the U.S. trade gap and adding half a percentage point to GDP growth in the last quarter.

A separate report from the Labor Department showed employment costs rose 0.5 percent in the fourth quarter, just a touch higher than analysts had expected, showing scant inflation pressure arising from wages.