The U.S. economy grew at an annual rate of 1.7 percent in the fourth quarter, the slowest pace in almost three years. Although consumer spending faltered, business investment in inventories accounted for most of the expansion and is contributing to faster growth in 2006.
Gross domestic product, the total value of goods and services generated during the period, rose to $11.25 trillion at an annual rate for the quarter after adjusting for inflation. It was $11.13 trillion for the year.
Before inflation, GDP grew at a 5.2 percent annual pace to $12.77 trillion for the quarter and totaled $12.49 trillion for the year.
The final revision of gross domestic product compares with a growth rate of 1.6 percent reported last month and 4.1 percent in the third quarter, the Commerce Department said today. An inflation measure watched by the Federal Reserve rose more than earlier reported and business profits increased by the most in 13 years.
The GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, or profits from current production, rose 14.4 percent to an annual rate of $1.48 trillion. Profits fell 4 percent in the third quarter.
The Fed this week called the fourth-quarter slowdown temporary and said growth ``rebounded strongly'' this quarter. Consumer spending accelerated early in 2006 and companies stepped up the pace of restocking, economists said. For all of last year, gross domestic product, the total volume of goods and services produced in the U.S., grew 3.5 percent, compared with 4.2 percent in 2004.
A separate report from the government today points to continued improvement in the labor market. First-time claims for U.S. unemployment benefits unexpectedly fell by 10,000 last week to 302,000, the Labor Department said. ``Economic growth has rebounded strongly in the current quarter but appears likely to moderate to a more sustainable pace,'' the Fed said in a March 28 statement. The same day, the Fed raised the main U.S. interest rate a quarter point to 4.75 percent and held out the prospect of further increases to keep inflation under control.
Business fixed investment, which includes spending on commercial construction as well as equipment and software, grew at an annual rate of 4.5 percent in the fourth quarter, compared with a 5.4 percent gain reported earlier and an 8.5 percent increase in the prior quarter.
Spending on equipment and software grew at an annual rate of 5 percent, revised from 6.2 percent. The gain followed a 10.6 percent rate of increase in the third quarter.
Inventories added 1.89 percentage points to economic growth in the final three months of last year, the first contribution in three quarters and the biggest since the first three months of 2002. A government report earlier this month showed that an increase in sales during January brought the supply of goods on shelves to a record-low 1.24 months, suggesting factories will lift production as businesses restock. Companies boosted inventories at an annual rate of $37.9 billion, compared with the $30.4 billion reported Feb. 28 and a reduction of $13.3 billion in the third quarter.
The trade deficit, which swelled to its widest ever in October, subtracted 1.36 percentage points from fourth-quarter growth instead of the 1.4 percentage points previously reported.
Government spending fell last quarter at an annual rate of 0.8 percent, compared with the 0.7 percent decline reported last month and a 2.9 percent third-quarter increase.
Demand is bouncing back this quarter as an improving labor market gives Americans more to spend on autos and other consumer goods, economists said. First-quarter consumer spending will probably rise at a 4.7 percent annual rate, based on the median estimate of economists surveyed by Bloomberg News from Feb. 27 to March 7.
The U.S. economy will grow at a 4.7 percent annual rate from January through March, the strongest in more than two years, according to the median forecast in the survey of 74 economists.
The GDP price index, a gauge of prices tied to the report, rose at an annual rate of 3.5 percent in the fourth quarter, compared with the 3.3 percent estimated in last month's report and a 3.3 percent third-quarter gain.
``I think the economy is growing at a very nice pace,'' James Tisch, chief executive officer at Loews Corp., said in a March 27 interview. New York-based Loews is a holding company that is an investor in cigarette maker Lorillard Inc. and also owns hotels. ``We are seeing strong demand in our hotel business.''
Economists expect businesses flush with cash to invest in new, more efficient equipment and to expand plants to help meet demand.
Union Pacific Corp., the biggest U.S. railroad, expects volume to increase 3 percent to 4 percent this year, said Chief Executive Officer James Young. Railroads are undertaking some of the largest capacity increases in history, he said in a March 27 interview.