US economy expanded in fourth quarter; jobless claims tumble

Q4 GDP (final) 2.6%, jobless claims 311,000
Q4 GDP (final) 2.6%, jobless claims 311,000

U.S. economic growth was a bit faster than previously estimated in the fourth quarter, displaying underlying strength that could bolster views that the slowdown in activity early in the year would be temporary.

The economic picture was also brightened by other data on Thursday showing new applications for unemployment benefits falling last week to their lowest level in nearly four months.

Gross domestic product expanded at a 2.6 percent annual rate, the Commerce Department said, up from the 2.4 percent pace it reported last month.

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The revision, which was broadly in line with economists' expectations, reflected a stronger pace of consumer spending than previously estimated.

Trucks loading with goods leave the port in New Jersey.
Justin Solomon | CNBC

Although the revised pace of expansions was still significantly slower than the 4.1 percent rate logged in the July-September quarter, the composition of growth in the fourth quarter suggested underlying strength in the economy.

Consumer spending, which accounts for more than two thirds of U.S. economic activity, was raised sharply higher and the pace of restocking by businesses was not as robust as previously estimated.

In addition, business spending on equipment was a bit stronger than previously estimated and the decline in government outlays was a little less pronounced.

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In a separate report, the Labor Department said initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 311,000, the lowest level since November.

Economists had expected first-time applications for jobless benefits to rise to 325,000 in the week ended March 22. The four-week average, considered a better measure of underlying labor market conditions as it irons out week-to-week volatility, fell to its lowest level since September.

U.S. Treasury debt prices fell on the data, with the yield on the benchmark 10-year note touching a session high. U.S. stock index futures were trading lower.

Growth revision shows underlying strength

The revision to fourth-quarter growth suggested the economy had momentum as 2013 ended and should regain strength once the effects of unseasonably cold weather that dampened activity at the beginning of this year start to abate.

Growth in the first quarter is expected to have slowed to a pace of around 2 percent.

Output has also been dampened by the expiration of long-term unemployment benefits, cuts to food stamps and businesses placing fewer orders with manufacturers as they work through a pile of unsold goods in their warehouses.

Consumer spending grew at a brisk 3.3 percent rate, reflecting strong growth in services. That reflected increased spending on health care and utilities. Spending on long-lasting manufactured goods was also revised higher.

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Consumer spending was previously reported to have increased at a 2.6 percent rate. The pace in the fourth quarter was the quickest in three years and contributed more than two percentage points to GDP growth.

Inventories, previously reported to have risen by $117.4 billion in the fourth quarter, were revised down to $111.7 billion. The downward revision, which is positive for near-term economic growth, resulted in inventories not contributing to growth in the quarter.

With fewer stocks on their shelves or in their warehouses, businesses now are more likely to need to place new orders or otherwise ramp up production to meet demand.

Business spending on equipment was revised up, but outlays on non-residential structures were lowered. Spending on home building and government outlays was not as weak as previously estimated.

By Reuters