U.S. economy shows some muscle, housing still lagging

By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy grew a bit faster than previously estimated in the fourth quarter and new claims for jobless aid dropped to a near four-month low last week, suggesting the economy has plenty of momentum to break out of its winter chill.

Housing, however, will probably take a while to pull out of its recent slump as contracts to buy previously owned homes fell to their lowest level in almost 2-1/2 years in February. Still, the better economic picture could see the Federal Reserve raising interest rates earlier than markets expect, economists said.

"The economy looks in a better place than it did just 24 hours ago. The outlook is assured, so look for the Fed to normalize its policy sooner rather than later," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Gross domestic product expanded at a 2.6 percent annual rate, the Commerce Department said on Thursday, up from the 2.4 percent pace it reported last month. The revision, which was broadly in line with economists' expectations, reflected a stronger pace of consumer spending than previously estimated.

Although the revised pace of expansion was still significantly slower than the 4.1 percent rate logged in the July-September quarter, the composition of growth in the fourth quarter suggested underlying strength in the economy.

Consumer spending, which accounts for more than two thirds of U.S. economic activity, was raised sharply higher and the pace of restocking by businesses was not as robust as previously estimated. Business spending on equipment was a bit stronger than previously estimated and the decline in government outlays was a little less pronounced.

"The recovery is finally self-sustaining. Although growth will be slightly weaker in the first quarter, the economy should quickly pick back up again in the second quarter," said Gus Faucher, a senior economist at PNC Financial Services in Pittsburgh.

A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 311,000, the lowest level since November.

Economists had expected first-time applications for jobless benefits to rise to 325,000 in the week ended March 22. The four-week average, which gives a better picture of underlying labor market conditions, hit its lowest level since September.

The dollar hit a session high against the yen on the data, while U.S. Treasury debt yields edged higher. Stocks on Wall Street were little changed, weighed down by lingering geopolitical uncertainties.

In another report, the National Association of Realtors said its pending home sales index, based on contracts signed last month, fell 0.8 percent to its lowest level since October 2011.

Housing has been hit by cold weather, a tight supply of properties for sales, as well as high mortgage rates. High house prices are also sidelining potential buyers, especially those venturing into the market for the first time.

Graphic - GDP: http://link.reuters.com/gyx64s

Graphic - Contributions to GDP: http://link.reuters.com/cyf86s

Graphic - Jobless claims: http://link.reuters.com/cud37s

GROWTH REVISION SHOWS UNDERLYING STRENGTH

The revision to fourth-quarter growth suggested the economy had momentum as 2013 ended and should regain strength once the effects of the unusually cold and snowy winter that depressed activity at the beginning of this year start to abate.

Growth in the first quarter is expected to have slowed to a pace of around 2 percent.

Output has also been temporarily dampened by the expiration of long-term unemployment benefits, cuts to food stamps and businesses placing fewer orders with manufacturers as they work through a pile of unsold goods in their warehouses.

Consumer spending grew at a brisk 3.3 percent rate, reflecting strong growth in services. That reflected increased spending on health care and utilities. Spending on long-lasting manufactured goods was also revised higher.

Consumer spending was previously reported to have increased at a 2.6 percent rate. The pace in the fourth quarter was the quickest in three years and contributed more than two percentage points to GDP growth.

Inventories, previously reported to have risen by $117.4 billion in the fourth quarter, were revised down to $111.7 billion. The downward revision, which is positive for near-term economic growth, resulted in inventories not contributing to growth in the quarter.

With fewer stocks on their shelves or in their warehouses, businesses now are more likely to need to place new orders or otherwise ramp up production to meet demand.

Business spending on equipment in the fourth quarter was revised up, but outlays on non-residential structures were lowered. Spending on home building was not as weak as previously estimated.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)