GDP Grew at 3 Percent Annual Rate
Business + Economy

GDP Grew at 3 Percent Annual Rate

The economy grew a bit faster than initially thought in the fourth quarter on slightly firmer consumer and business spending, calming fears of a sharp slowdown in growth in early 2012. Gross domestic product expanded at a 3 percent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said on Wednesday in its second estimate. That was a step up from the 2.8 percent pace it reported in January. Economists polled by Reuters had expected fourth-quarter GDP would be unrevised at a 2.8 percent pace. The economy grew at a 1.8 percent pace in the third quarter.

"This shows a steady improvement despite all the volatility in stock prices we had last year and shows that we are nowhere near lapsing back to recession," said Tim Ghriskey, chief investment officer at Solaris Group in New York. U.S. stock index futures added to gains on the data, while prices for Treasury debt trimmed gains. The dollar pared losses against the yen.

A sustained GDP growth pace of at least 3 percent would likely be needed to make noticeable headway in absorbing the unemployed and those who have given up the search for work. While a build-up in business inventories still accounted for much of rise in output in the last quarter, revisions to GDP unveiled an improved tone for the first-quarter growth outlook.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, was raised to a 2.1 percent rate from 2 percent. Business investment in capital goods was lifted to a 2.8 percent pace from 1.7 percent, but still weak compared to the recent trend. Outlays on home building were firmer than previously estimated, while investment on nonresidential structures was modestly weak.

So far data ranging from employment to manufacturing have shown underlying strength in the economy, reducing the need for the Federal Reserve to ease monetary policy further by launching a third round of asset purchases or quantitative easing. Fed Chairman Ben Bernanke is scheduled to testify on monetary policy before lawmakers on Wednesday at 10 a.m.

But surging gasoline prices, which have risen 12.6 percent or 42 cents since the start of the year and averaged $3.78 a gallon in the week through Monday, are clouding the outlook. High gasoline prices helped to almost snuff out growth early last year. However, economists believe the impact on households this time could be mitigated somewhat by weak costs for natural gas and a strengthening labor market.

While the rebuilding of inventories added a hefty 1.88 percentage points to GDP in the last quarter, the increase was revised down to $54.3 billion from $56.0 billion. This suggests scope for more stock accumulation this quarter, but not at the same magnitude as the final three months of last year. Excluding inventories, the economy grew at a 1.1 percent rate, rather than 0.8 percent. That was still a sharp step-down from the prior period's 3.2 percent pace.

The report also showed exports were not as strong as previously thought, but imports are also not growing strongly, leaving a smaller trade gap that was less of a drag on growth. It also showed still moderate inflation pressures, though a price index for personal spending rose at a 1.2 percent rate instead of 0.7 percent. A core measure that strips out food and energy costs rose at a 1.3 percent rate instead of 1.1 percent. The Fed would prefer to see this measure nearer its 2 percent inflation target.