Upward GDP revision a concern

U.S. economic growth at the close of 2006 was revised up, according to a government report Thursday, but a primary factor for the revision -- rising inventories of unsold goods -- cast a shadow over future prospects.

The Commerce Department said fourth-quarter gross domestic product, measuring total goods and services output within U.S. borders, grew at a 2.5% annual rate instead of the 2.2% reported a month ago, up from 2% in the third quarter.

Separately, Labor Department data showed new jobless claims unexpectedly fell 10,000 last week to a seasonally adjusted 308,000, offering no sign that companies are trying to trim payrolls.

The GDP report showed that inventories rose more than first thought at the end of last year, which could lead businesses to hold back future production. In addition, spending on new-home building plunged again and investment by businesses softened more than previously thought.

“The [GDP] headline number looks better, but the gut of the report is a little worse,” said Robert Brusca, chief economist for Fact and Opinion Economics in New York.

Business investment spending fell at a 3.1% annual rate in the fourth quarter rather than the 2.4% decline the government estimated a month ago. That contrasted with a 10% jump in the third quarter.

Spending on new-home building dropped at a 19.8% rate -- steeper than the 19.1% fall estimated a month ago -- after an 18.7% drop in the third quarter.

It was the fifth straight quarter that residential spending had fallen and the steepest since a 21.7% plunge in the first quarter of 1991 when the economy was on the brink of recession.

The housing sector is under mounting pressure as problems in the sub-prime mortgage industry accumulate, though some policymakers say those problems should not spill over into the broader economy.

Speaking in Dayton, Ohio, Minneapolis Federal Reserve Bank President Gary Stern on Thursday described the economy as “anything but fragile” and said the worst of the housing slump had passed.

Many analysts forecast that GDP growth will ease to a 2% rate or less in the current quarter, which ends Saturday. For all of last year, the GDP expanded 3.3% -- topping 3% for the third straight year after growth of 3.2% in 2005 and 3.9% in 2004.

There was a significant downward revision in spending on equipment and software, which dropped at a 4.8% annual rate in the fourth quarter instead of 3.2%. That was the biggest decline since the 4.9% drop in the fourth quarter of 2002 and a sharp turnaround from the third quarter, when such spending grew at a 7.7% rate.

The main reason for the upward revision in fourth-quarter GDP was the inventory figure. Companies added to inventories at a $22.4-billion annual rate in the quarter rather than the $17.3-billion rate the government reported a month ago.

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