By Lucia Mutikani
WASHINGTON (Reuters) -The U.S. economy grew at a solid clip in the fourth quarter amid robust consumer spending, the government confirmed on Wednesday, which bodes well for the outlook this year despite a weak start because of bad weather.
The report from the Commerce Department showed a much stronger growth profile last quarter, with upgrades to consumer spending, state and local government investment as well as residential and business outlays.
"Though weather wreaked havoc on some of the data for January, including retail sales, housing starts, and home sales, risks are still weighted toward the upside for growth early this year," said Ryan Sweet, chief U.S. economist at Oxford Economics. "A weather-related rebound in activity in February coupled with a recent surge in tax refunds should provide a boost to growth in retail sales."
Gross domestic product increased at a 3.2% annualized rate last quarter, revised slightly down from the previously reported 3.3% pace, the Commerce Department's Bureau of Economic Analysis said in its second estimate of fourth-quarter GDP growth.
Economists polled by Reuters had expected that GDP growth would be unrevised. The modest downward revision reflected a downgrade to private inventory investment, which was now estimated to have increased at a $66.3 billion rate instead of the previously reported $82.7 billion pace.
Inventories subtracted 0.27% percentage point from GDP growth instead of being almost neutral as initially thought.
The economy grew at a 4.9% pace in the July-September quarter. It expanded 2.5% in 2023, an acceleration from 1.9% in 2022, and is growing above what Federal Reserve officials regard as the non-inflationary growth rate of 1.8%.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.0% rate. It was previously estimated to have grown at a 2.8% pace. Domestic demand was stronger than initially thought, growing at a 2.9% rate instead of the previously reported 2.6% rate.
Inflation was fairly mild last quarter, though revised slightly up from previously reported estimates. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose at a 2.1% pace.
The so-called core PCE price index was initially reported to have increased at a 2.0% rate. Core inflation last quarter was a touch above the Fed's 2% target, and continues to be driven by higher housing costs.
PCE services inflation excluding energy and housing increased at a 2.7% rate, revised up from the previously estimated 2.6% pace. Policymakers are watching this so-called super core inflation measure to assess progress in their fight against inflation.
Financial markets expect the Fed to start cutting interest rates in June, a bet that has been pushed back from May. Since March 2022, the U.S. central bank has raised its policy rate by 525 basis points to the current 5.25%-5.50% range.
Growth in business investment was raised last quarter to a 2.4% rate from the previously estimated 1.9% pace, driven by upgrades to spending on nonresidential structures like factories.
But business investment in equipment was revised down to show it contracting at a 1.7% pace instead of rising at a 1.0%.
Business spending on equipment appears to have remained weak at the start of the first quarter as shipments of non-defense capital goods fell by the most in more than three years in January. While retail sales, housing starts, durable goods orders and production at factories dropped in January, the declines were blamed on freezing temperatures as well as difficulties adjusting the data for seasonal fluctuations at the start of the year. Economists are not forecasting a recession this year.
GOODS TRADE GAP WIDENS
A separate report from the Commerce Department on Wednesday showed a widening in the goods trade gap last month.
The goods trade deficit increased 2.6% to $90.2 last month, the Commerce Department's Census Bureau said. Exports rose 0.2% to $170.4 billion. They were outpaced by a 1.1% jump in imports to $260.6 billion. Exports added 0.69 percentage point to GDP growth last quarter.
The report also showed wholesale inventories declined 0.1% in January after rising 0.4% in the prior month. Stocks at retailers increased 0.5% after advancing 0.6% in December.