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Fourth-Quarter GDP Revised Up to 2.5%; Jobless Claims Drop

U.S. economic growth was moderately stronger in the fourth quarter than previously thought, primarily because businesses added more to inventories than was estimated a month ago, the Commerce Department reported on Thursday.

Meanwhile, a separate report from the Labor Department showed the number of U.S. workers filing new claims for jobless benefits dropped unexpectedly by 10,000 last week to the lowest level in more than two months. The new data supports the idea that the labor market remains healthy.

Gross Domestic Product or GDP, which measures total goods and services output within U.S. borders, expanded at a 2.5% annual rate instead of 2.2%, the department said in its final revision of fourth-quarter economic performance.

Economists had expected the final fourth-quarter reading of GDP growth to be unrevised at 2.2%.

The final figure was up from a 2% rate in the third quarter and meant the economy expanded by a solid 3.3% during the whole of 2006. It was the third straight year that GDP expanded at a rate over 3%, following growth of 3.2% in 2005 and 3.9% in 2004.

The department said companies added to inventories at a $22.4-billion annual rate in the closing quarter of 2006 rather than the $17.3 billion rate it reported a month ago and said that was the main reason for the upward revision in fourth-quarter GDP.

Large Vehicle Stocks Drive Inventories

Higher inventories were mostly accounted for by larger stocks of motor vehicles. Larger inventories can reflect a backlog of unsold goods or businesses building stocks up in anticipation of better sales ahead.

A prices gauge favored by the Federal Reserve -- personal consumption expenditures excluding food and energy items -- advanced at a slightly slower 1.8% annual rate in the fourth quarter instead of the 1.9% estimated a month ago and was down from 2.2% in the third quarter.

Fed Chairman Ben Bernanke, testifying before Congress on Wednesday, said potential inflation remains the U.S. central bank's primary policy concern. He also said that problems in the mortgage lending business were not expected to spill over and cause a widespread economic slowdown.

Still, the fourth-quarter GDP report showed that investment in new-home building plummeted by 19.8% -- even steeper than the 19.1% fall estimated a month ago -- and has declined for five straight quarters. The fourth-quarter drop was the sharpest since a 21.7% plunge in the first quarter of 1991 when the economy was on the brink of recession.

There was also a significant revision in spending on equipment and software, which dropped at a 4.8% annual rate during the fourth quarter -- the largest decline since 4.9% in the fourth quarter of 2002 -- instead of the 3.2% drop reported a month ago. That was a sharp turnaround from the third quarter when equipment and software spending grew at a 7.7% rate.

On Wednesday, the Commerce Department said orders for long-lasting durable goods rose 2.5% in February, only partly recovering from a 9.3% plunge in January. Softer orders potentially foreshadow a lingering reluctance by businesses to invest in more production machinery that, in turn, could act as a drag on overall growth in 2007.

Nonresidential investment, a proxy for business spending on new equipment, declined at a revised 3.1% annual rate in the fourth quarter rather than the 2.4% decline the government estimated a month ago. That was a sharp reversal from the third quarter when investment spending jumped by 10%.

Initial Jobless Claims Fall To 308,000

Separately, initial filings for state unemployment insurance aid for the week ended March 24, fell to a seasonally adjusted 308,000 from an upwardly revised 318,000 the prior week, the Labor Department said.

A department analyst said there were no special factors behind the decline in new claims, which dropped to their lowest level since the week ended Jan. 13.

Analysts on Wall Street were expecting claims to edge up to 320,000 from the 316,000 claims initially reported for the March 17 week.

The four-week moving average of claims, which irons out weekly volatility to provide a better sense of underlying job-market trends, fell for the third straight week, dropping to 316,750 from 324,000 in the prior week.

The total number of unemployed still on the benefit rolls after drawing an initial week of aid rose 32,000 to 2.53 million in the week ended March 17, the latest period for which these figures are available.