WRAPUP 7-U.S. Q4 economic growth fastest in six years

* GDP grows at 5.7 pct pace in Q4, fastest in six years

* Inventories main driver, may overstate recovery strength

* Business investment up for first time since Q2 2008

* Midwest business activity index highest in four years
(Adds Reuters Breakingviews link)

By Lucia Mutikani

WASHINGTON, Jan 29 (BestGrowthStock) – The U.S. economy grew at its
fastest pace in more than six years in the fourth quarter,
surprising economists, as businesses curbed their aggressive
cut in stocks and stepped up spending.

The robust growth pointed to a sustainable recovery in a
crucial period before government stimulus plans run out and was
good news for an administration amid political difficulties.

Gross domestic product expanded at a 5.7 percent annual
rate, the Commerce Department said on Friday in its first
estimate for the quarter. It was a strong end to a year in
which the economy shrank by 2.4 percent — the worst
performance since 1946.

While much of the growth resulted from companies’ drawing
down inventories more slowly than they did earlier in the year
rather than from a surge in domestic demand, economists said it
was still a positive report.

“The data shows that the necessary transition from
government stimulus to private sector spending is under way,
which is essential to sustain the economic expansion,” said
Stuart Hoffman, chief economist at PNC Financial Services Group
in Pittsburgh.

U.S. stocks (Read more about the stock market today. ) initially rallied on the eye-catching growth
number but ended down on worries about credit troubles in
Europe. Stock market losses fed investors’ preference for
safe-haven U.S. government bonds, while the U.S. dollar rallied
against major currencies.

Getting the economy on a sustainable growth track remains
one of the key challenges facing President Barack Obama, who on
Wednesday outlined measures to create jobs and nurture the

The government will release its closely watched employment
report for January next Friday. A Reuters survey forecast
payrolls grew by 5,000 jobs after an 85,000 drop in December.

The economic picture was further brightened by a jump in
Midwest business activity in January to its highest level in
four years, while consumer confidence hit a two-year high. For
details see [ID:nN29179061] [ID:nN29224356].

Economists said they expected the lift from inventories to
fade over time, with economic growth moderating in the second
half of the year.

“The economy’s engine is running, but to some degree we’re
still in a ditch spinning our wheels. With fiscal and monetary
fuel running out, we need job growth to get us firmly on the
road to recovery,” said Bill Cheney, chief economist at John
Hancock Financial in Boston.


The slowing rate of inventory reduction in the fourth
compared to the third quarter lifted GDP by nearly 3.4
percentage points, the biggest contribution inventories have
made to GDP growth since the fourth quarter of 1987.

When businesses sell off inventories, there is less of a
need to step up production and it weighs on GDP. With the
liquidation rate slowing, GDP was boosted.

But even with inventories stripped out, the economy
expanded at an annual rate of 2.2 percent, accelerating from
the 1.5 percent increase in the third quarter. That reflected
relatively strong performance from other segments of the
economy, particularly business investment.

Still, this measure of final demand is meager compared with
most normal recoveries, implying the Federal Reserve can bide
its time before raising interest rates.

Consumer spending increased at a 2 percent annual rate,
contributing 1.44 percentage points to GDP. In the third
quarter, consumer spending had risen at a 2.8 percent pace,
supported by the government’s “cash for clunkers” program.

Business investment grew at at 2.9 percent rate, the first
increase since the second quarter of 2008, as the drag from the
troubled commercial real estate was offset by robust spending
on equipment and software.

“The solid increase in investment in equipment and
software, if confirmed, might indicate that a more solid
recovery is under way,” said Harm Bandholz, an economist at
UniCredit Research in New York. Some economists said it
suggested a budding confidence that could lead to hiring.

Third-quarter growth was put at 2.2 percent after an
earlier estimate of 3.5 percent.

The growth of spending on new home construction braked
sharply in the fourth quarter to an annual rate of 5.7 percent
from an 18.9 percent pace in the third quarter.

Home building has received a lift from a popular tax credit
for first-time buyers, but recent data have hinted at some
weakness. Export growth outpaced imports, narrowing the U.S.
trade gap and adding half a percentage point to GDP growth in
the last quarter.

For graphic on GDP, see: http://link.reuters.com/suk66h

For graphic on GDP and inventories see


For Reuters Breakingviews please see: [ID:nN29205831]
(Additional reporting by Lisa Lambert; Editing by Kenneth

WRAPUP 7-U.S. Q4 economic growth fastest in six years