U.S. Economy Grew 3.1% in Fourth Quarter, Revised From 2.8%

The U.S. economy grew at a 3.1 percent annual rate in the fourth quarter, led by a jump in consumer spending that will be hard to match early in the year as energy prices surge.

The revised increase in gross domestic product compares with a 2.8 percent estimate issued last month, figures from the Commerce Department showed today in Washington. Earnings at financial firms led a 2.3 percent increase in corporate profits from October to December that capped the biggest annual gain in six decades.

Surging oil prices sparked by turmoil in the Middle East may erode consumers’ purchasing power, and supply constraints caused by the tragedy in Japan may slow the pace of recovery this quarter. At the same time, lean inventories and growing demand from emerging economies will probably keep benefiting companies like Caterpillar Inc. (CAT), sustaining the expansion.

“The upward revisions are encouraging, though things are shaping up to be a bit of a disappointment this quarter,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, who correctly forecast the gain in GDP. “Consumer spending seems to be a little bit softer than we anticipated. We know we’ll hit speed bumps, but the recovery will gather momentum through the year and into 2012.”

Another report showed consumer sentiment this month declined more than forecast as surging fuel prices squeezed household budgets. The Thomson Reuters/University of Michigan final index of consumer sentiment for March fell to 67.5 from 77.5 in February, the group reported.

Shares Climb

Stocks rose as forecasts by technology companies like Oracle Corp. beat analysts’ estimates. The Standard & Poor’s 500 Index rose 0.3 percent to 1,313.64 at 10:30 a.m. in New York. Treasury securities also gained, pushing the yield on the benchmark 10-year note down to 3.39 percent compared with 3.41 percent late yesterday.

GDP was projected to expand at a 3 percent pace in the fourth-quarter, according to the median forecast in a Bloomberg News survey of 81 economists. Estimates ranged from 2.7 percent to 3.4 percent. The world’s largest economy grew at a 2.6 percent pace in the previous three months.

For all of 2010, the economy expanded 2.9 percent, the most in five years, after shrinking 2.6 percent in 2009.

Higher Profits

Company earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, rose by $38.2 billion from the third quarter. Domestic profits at financial corporations increased by $57.7 billion, while earnings at non-financial businesses fell by $10.1 billion. Earnings from operations overseas dropped by $9.4 billion.

For the first time since before the recession began in December 2007, profits for the quarter reached a record, at $1.68 trillion at an annualized rate. For all of 2010, profits climbed 29 percent, the biggest annual gain since 1948.

Consumer spending, about 70 percent of the economy, rose at a 4 percent pace last quarter, the most since the same three months in 2006, compared with 4.1 percent previously estimated and a 2.4 percent rate in the third quarter.

The gain in consumer spending compared with a 4.1 percent median forecast in the Bloomberg survey. Purchases added 2.8 percentage points to growth.

Investment, Inventories

The upward revision to growth was paced by a bigger increase in business investment and a smaller slowdown in stockpiling than previously estimated.

Spending on equipment and software climbed at a 7.7 percent annual pace last quarter, up from last month’s 5.5 percent estimate.

Inventories last quarter were stocked at a $16.2 billion pace, compared with a previously reported $7.1 billion rate and down from a $121.4 billion rate in the third quarter.

While leaner stockpiles help set the stage for faster growth, they are also a double-edged sword when supply chains are disrupted by natural disasters like the earthquake and tsunami in Japan. General Motors Co. has idled a pickup factory in Shreveport, Louisiana, because of parts shortages, and Boeing Co. is also among companies dependent on getting supplies from the Asian nation.

The Federal Reserve’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.4 percent annual pace, the smallest increase in data going back to 1959 and less than the 0.5 percent previously estimated. The Fed’s longer term projection for inflation is a range of 1.6 percent to 2 percent. Rising oil and food costs may push up the prices of other goods and services.

Fuel Costs

Oil that topped $106 a barrel this week and a labor-market recovery that is taking time to develop threaten to restrain consumer spending.

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., on March 11 downgraded his first quarter growth estimate to 2.5 percent from 3.5 percent, citing weaker-than-forecast trade deficit caused by a jump in imports and retail sales data.

The manufacturing industries that account for 11 percent of the economy are likely to remain at the forefront of the recovery on growing demand from abroad and the need to replenish inventories.

Caterpillar, the world’s largest maker of construction equipment, is seeing a “slow, steady increase” in demand in North America, its Chief Executive Officer Doug Oberhelman said this week at an industry conference in Las Vegas. “Business is booming outside the U.S.,” Oberhelman said.

Recalling Workers

Improving demand is encouraging some companies to take on more employees, cushioning earlier cutbacks. General Motors Co. (GM) will recall the last of its laid-off workers by September, United Auto Workers Vice President Joe Ashton said this week.

“We only have about 2,000 people now laid off and those people will all be back to work in September,” Ashton, who handles negotiations with GM, told union workers at the UAW’s Special Convention on Collective Bargaining in Detroit.

The government’s extension in December of Bush era tax cuts and cuts to payroll taxes of 2 percentage points will help underpin spending and hiring, while another measure that lets firms depreciate 100 percent of capital expenditures over the course of 2011 may spur business investment.

Today’s GDP estimate is the last of three for the quarter.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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