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The Economy Grew More Than We Thought

February 26, 2016

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Workers in a steel factoryPhotograph by Buena Vista Images Getty Images

U.S. economic growth slowed in the fourth quarter, but not as sharply as initially thought, with businesses less aggressive in their efforts to reduce unwanted inventory, which could hurt output in the first three months of 2016.

Gross domestic product increased at a 1% annual rate instead of the previously reported 0.7% pace, the Commerce Department said on Friday in its second GDP estimate.

Economists polled by Reuters had expected that fourth-quarter GDP growth would be revised down to a 0.4% pace. The economy grew at a rate of 2% in the third quarter.

Businesses accumulated $81.7 billion worth of inventory rather than the $68.6 billion reported last month. That reflected an upward revision to inventory valuation adjustment.

The largest contributors to the upward revision to inventory investment were retail trade and mining, utilities, and construction. As a result, inventories subtracted only 0.14 percentage point from GDP growth instead of the previously reported 0.45 percentage point.

The bigger inventory build is bad news for first-quarter GDP growth as it means businesses will have little incentive to place new orders, which will continue to hold down production.

 

First-quarter GDP growth estimates are as high as a 2.5% rate, but the risks are tilted to the downside amid slowing world economies, a strong dollar and a recent global stock market sell-off that has tightened financial market conditions.

Cheap oil has also been a drag on the profits of oil field companies such as Schlumberger (SLB) and Halliburton (HAL), prompting them to slash capital expenditure budgets.

The upward revision to fourth-quarter GDP growth also reflected a smaller trade deficit than initially thought as imports contracted. The trade deficit subtracted 0.25 percentage point from GDP growth instead of the 0.47 percentage point reported last month.

Business spending on equipment contracted at a less steep 1.8% rate last quarter, compared to the previously reported 2.5% rate.

There were minor downward revisions to consumer spending, which accounts for more than two thirds of U.S. economic activity. Consumer spending rose at a 2% pace rather than the 2.2% rate reported last month.

Unusually mild weather hurt sales of winter apparel in December and undermined demand for heating through the quarter. But there are signs consumption picked up in January with the return to more normal winter temperatures.

With gasoline prices around $2 per gallon, a tightening labor market gradually lifting wages and house prices boosting household wealth, the fundamentals for consumer spending remain very strong.

Business spending on nonresidential structures contracted at a 6.6% rate rather than the 5.3% pace the government reported last month. Government spending contracted at a 0.1% rate instead of rising at a 0.7% rate.