U.S. economy barely expands in Q4, brighter days ahead

WASHINGTON (Reuters) - The U.S. economy barely grew in the fourth quarter as the military slashed spending and companies restocked their shelves with less gusto, but growth already appears to be picking up.

The Commerce Department said on Thursday the economy expanded at a 0.1 percent annual rate in the last three months of 2012, scratching an earlier estimate that had showed a small decline.

The growth rate was the slowest since the first quarter of 2011 and fell short of the 0.5 percent economists had expected.

But consumer spending, while not stellar, was comparatively robust and economists see signs the factors that restrained growth late last year are already reversing in the first quarter. A month ago, the government had said the economy contracted at a 0.1 percent pace.

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“The details of the report bode well for the beginning of this year,” said Harm Bandholz, an economist at UniCredit in New York.

Indeed, other reports on Thursday showed a drop in new claims for jobless benefits last week and a sharp rise in factory activity in the Midwest, adding to a string of recent data that suggests the economy improved early this year.

The GDP report showed consumer spending expanded at a 2.1 percent annual rate in the fourth quarter. That suggests modest underlying momentum in the economy as it entered the first quarter, when a significant tightening of fiscal policy began.

Inventories subtracted 1.6 percentage points from the GDP growth rate during the fourth quarter, while defense spending plunged 22 percent, shaving 1.3 points off growth. Many economists expect both of those categories to add to growth in the first three months of the year.

The drag from inventories was actually greater late last year than initially estimated, suggesting an even sharper rebound is due in the first quarter.

Data on retail sales and on housing have suggested a tax hike enacted in January did not deal a big blow to households, and most economists think growth will pick up later this year despite a wave of federal spending cuts due to begin on Friday.

POCKETS OF STRENGTH

There were some relatively bright spots in the GDP data.

Imports fell 4.5 percent during the period, which added to the overall growth rate because it was a larger drop than in the third quarter. Buying goods from foreigners bleeds money from the economy, subtracting from economic growth.

At the same time, exports did not fall as much as the government had thought when it released its earlier estimate. Exports have been hampered by a recession in Europe, a cooling Chinese economy and storm-related port disruptions.

Excluding the volatile inventories component, GDP rose at a revised 1.7 percent rate, in line with expectations. These final sales of goods and services had been previously estimated to have increased at a 1.1 percent pace.

Business spending was revised to show more growth during the period than initially thought, adding about a percentage point to the growth rate.

Growth in home building was revised slightly higher to a 17.5 percent annual rate. Residential construction is one of the brighter spots in the economy and is benefiting from the Federal Reserve’s ultra-easy monetary policy stance, which has driven mortgage rates to record lows.

JOBLESS CLAIMS FALL

A separate report showed the number of Americans filing new claims for unemployment benefits fell more than expected last week, suggesting some traction in the labor market recovery.

Initial claims for state jobless benefits dropped 22,000 to a seasonally adjusted 344,000, the Labor Department said.

Economists polled by Reuters had expected first-time applications to fall to 360,000.

While the level of jobless claims is near where it was in the early days of the 2007-09 recession, hiring has remained quite lackluster. Job gains have averaged 177,000 per month over the past six months.

High unemployment prompted the U.S. central bank last year to launch an open-ended bond buying program that it said it would keep up until it saw a substantial improvement in the outlook for the labor market.

In a separate report, the Institute for Supply Management-Chicago said the pace of business activity in the U.S. Midwest rose to its highest level in nearly a year in February as new orders increased.

(Additional reporting by Lucia Mutikani in Washington and Leah Schnurr in New York; Editing by Andrea Ricci and Tim Ahmann)