By Lucia MutikanI
WASHINGTON- US economic growth in the fourth quarter was lowered slightly, but its composition was much stronger than initially thought, which bodes well for the near-term outlook even as activity got off to a weak start because of freezing temperatures.
The Commerce Department’s slight downward revision to gross domestic product growth on Wednesday reflected a downgrade to inventory investment. There were upgrades to consumer spending, state and local government investment as well as residential and business outlays.
The economy has defied dire warnings of a recession after the Federal Reserve aggressively raised interest rates to tame inflation, thanks to a tight labor market that is keeping wages elevated and supporting consumer spending.
“Though weather wreaked havoc on some of the data for January, risks are still weighted toward the upside for growth early this year,” said Ryan Sweet, chief US 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.”
GDP increased at a 3.2 percent annualized rate last quarter, revised slightly down from the previously reported 3.3 percent 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 GDP growth would be unrevised. Private inventory investment is now estimated to have increased at a $66.3 billion rate instead of the previously reported $82.7 billion pace.
Inventories subtracted 0.3 percent percentage point from GDP growth instead of adding 0.1 percentage point as initially thought.
The economy grew at a 4.9 percent pace in the July-September quarter. It expanded 2.5 percent in 2023, an acceleration from 1.9 percent in 2022, and is growing above what Fed officials regard as the non-inflationary growth rate of 1.8 percent .
Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 3.0 percent rate, adding two percentage points to GDP growth. It was previously estimated to have grown at a 2.8 percent pace.
Stronger consumer spending together with the upgrades to investment in homebuilding and business outlays, mostly nonresidential structures like factories, means domestic demand was stronger than initially thought. Final sales to private domestic purchasers, a measure of domestic demand, grew at a 2.9 percent rate instead of the previously reported 2.6 percent rate.
With demand firmer, inflation was revised slightly up, but the pace of increase was still milder relative to earlier in the year. The personal consumption expenditures (PCE) price index excluding the volatile food and energy components rose at a 2.1 percent pace. The so-called core PCE price index was initially reported to have increased at a 2.0 percent rate.
Core inflation last quarter was a touch above the Fed’s 2 percent target, and continues to be driven by higher housing costs. Economists largely maintained their forecasts for January PCE inflation, due to be published on Thursday. Inflation is expected to have accelerated following larger-than-expected increases in consumer, producer and import prices in January.
The pick-up in inflation, which led financial markets to push back rate-cut expectations to June from May, were attributed to price rises at the beginning of the year.
Economists expect core PCE inflation rose 0.4 percent in January, with the risk of it being rounded up to 0.5 percent . The core PCE price index climbed 0.2 percent in December. In the 12 months through January, core inflation was forecast to increase by about 2.9 percent , matching December’s rise.
Since March 2022, the US central bank has raised its policy rate by 525 basis points to the current 5.25 percent -5.50 percent range.
Stocks on Wall Street were trading lower on Wednesday, while the dollar edged higher against a basket of currencies. Prices of US Treasuries ticked up.
“The mix of spending in the fourth quarter shifted to more final demand,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York. “This revision may lift projections for first-quarter growth modestly.”