The U.S. government is set to slash its estimate of fourth-quarter growth as exports and restocking by businesses were less robust than previously thought, leaving the economy on a more familiar path of modest expansion.
Gross domestic product growth will probably be lowered to a 2.5 percent annual rate, according to a Reuters poll of economists. That would be down sharply from the 3.2 percent pace reported last month and the 4.1 percent logged in the third quarter.
"The revision to the GDP number will better reflect the underlying economic trend because the increases in inventories and exports that massively lifted growth in the second half of the year were simply not sustainable," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.
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The Commerce Department will release its fresh estimate of fourth-quarter GDP at 8:30 a.m. ET on Friday.
It is not unusual for the government to make sharp revisions to GDP numbers as it does not have complete data when it makes its initial estimates. In fact, the figures on Friday will be subject to revisions next month as more information is received.
If economists' forecasts are correct, Friday's revision will leave GDP just above the economy's potential growth trend, which analysts put somewhere between a 2 percent and 2.3 percent pace.
Trade is expected to account for a large chunk of the revision. A report earlier this month showed exports fell in December, leading to a bigger trade deficit in the fourth quarter than the government had assumed.
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Initial estimates had trade adding 1.33 percentage points to GDP growth in the fourth quarter. Economists expect trade's contribution will be cut down to about 1.0 percentage point.
"This is still a sizable contribution to GDP growth and the largest since late 2010," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania.
Inventories give less of a boost
Inventories, previously reported to have risen by $127.2 billion in the fourth quarter, are likely to be revised down.
The reported increase in the stocks of unsold goods in the fourth quarter was the largest in nearly 16 years and followed a gain of $115.7 billion in the third quarter.
But economists expect the contribution to growth from inventories, which the government put at 0.42 percentage point a month ago, could be revised to just about two-tenths of a percentage point.
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Downward revisions are also expected to consumer spending after data showed weak retail sales in November and December. Consumer spending had been estimated expanding at a 3.3 percent rate in the fourth quarter, the fastest in three years.
That could be lowered to a pace of about 3 percent. Consumer spending accounts for more than two-thirds of U.S. economic activity. As a result, final domestic demand is likely to be revised weaker than the 1.4 percent rate previously reported.
The loss of momentum appears to have spilled over into in the first quarter, with an unusually cold winter weighing on retail sales, home building and sales, hiring and industrial production.
The Federal Reserve, which has been cutting back on the amount of money it is injecting into the economy through monthly bond purchases, views the recent soft patch as temporary.
Fed Chair Janet Yellen told lawmakers on Thursday that severe weather had played a role in the weakening of the data. She said, however, that it would take a "significant change" to the economy's prospects for the Fed to put plans to wind down its bond buying on hold.
Despite the first quarter's weak start, economists remain optimistic that growth this year will be the strongest since the recession ended almost five years ago.
"We may have the headline GDP number revised down, but I would not interpret that as a weakening in overall economic conditions. We just have some headwinds," said Adolfo Laurenti, deputy chief economist at Mesirow Financial in Chicago. "I remain fairly optimistic about the outlook for 2014."
Government spending is likely to be revised downward, but the impact will probably be offset by upward revisions to investment in residential construction, nonresidential structures and business spending on equipment.