U.S. economy slowed in Q4, but growth outlook still favorable

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. economic growth braked more sharply than initially thought in the fourth quarter as businesses slowed their pace of stock accumulation and the trade deficit widened, but the underlying fundamentals remained solid.

Gross domestic product expanded at a 2.2 percent annual pace, revised down from the 2.6 percent pace estimated last month, the Commerce Department said on Friday. The economy grew at a 5 percent rate in the third quarter.

With consumer spending accelerating at its quickest pace since the first quarter of 2006 and sturdy gains in other measures of domestic demand, the slowdown in growth is likely to be temporary.

"There is every reason to believe that domestic demand will grow at a rapid clip over the first half of this year too," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down by one-tenth of a percentage point to a 4.2 percent pace in the fourth quarter, still the fastest since the first quarter of 2006.

A tightening labor market and lower gasoline prices are likely to keep supporting domestic demand and help the economy navigate a turbulent global economy.

Improved employment prospects and cheaper gasoline also are keeping consumers in a buoyant mood.

A second report showed the University of Michigan's final February reading on the overall index on consumer sentiment was 95.4, higher than the initial reading of 93.6. The data pointed to sturdy consumer spending growth this year.

"We continue to expect consumer spending to kick the year off on a robust foot after the drop in energy prices gave consumers a substantial windfall," said Bricklin Dwyer, an economist at BNP Paribas in New York.

Business spending on equipment in the fourth quarter was revised to show it rising at a 0.9 percent rate instead of the previously reported 1.9 percent contraction.

A first-quarter acceleration is now in the cards, with data on Thursday showing a rebound in business spending intentions in January after four straight months of declines.

STURDY DOMESTIC DEMAND

The Commerce Department data showed that growth in final sales to domestic purchasers, a key measure of domestic demand, was revised to a 3.2 percent pace for the fourth quarter from the previous 2.8 percent rate.

The GDP growth revision was generally in line with expectations. Prices for most U.S. Treasury debt rose, while U.S. stocks were trading marginally lower. The U.S. dollar fell against a basket of currencies.

Businesses accumulated $88.4 billion worth of inventory in the fourth quarter, far less than the $113.1 billion the government had estimated last month.

That resulted in the GDP growth contribution from inventories being revised down to one-tenth of a percentage point from 0.8 percentage point previously.

The slower pace of inventory accumulation, however, will be a boost to GDP growth this quarter. Current estimates put the first-quarter growth pace at between 2.4 percent and 3 percent.

Strong domestic demand sucked in more imports than previously reported in the fourth quarter, resulting in a trade deficit, which subtracted 1.15 percentage points from GDP growth instead of the previously reported 1.02 percentage point drag.

Despite the strong consumption, inflation pressures were muted, with the personal consumption expenditures price index falling at a 0.4 percent rate - the weakest reading since early 2009. The PCE index was previously reported to have declined at a 0.5 percent pace.

Excluding food and energy, prices rose at an unrevised 1.1 percent pace, the slowest since the second quarter of 2013.

The low inflation environment suggests little urgency for the Federal Reserve to start raising interest rates from near zero, where they have been since December 2008.

Residential construction spending in the fourth quarter was revised down, while government spending was not as weak as previously reported.

But with the labor market gaining steam, housing is set for an acceleration this year.

A third report on Friday from the National Association of Realtors showed contracts to purchase previously owned homes rose 1.7 percent in January to their highest level in 1-1/2 years.

(Reporting by Lucia Mutikani; Editing by Paul Simao)