Economy in U.S. Ekes Out 0.1% Gain as Trade Gap Shrinks

The economy in the U.S. managed to barely expand in the fourth quarter, erasing a previously estimated contraction, as the smallest trade deficit in almost three years helped overcome the biggest plunge in defense spending since the Vietnam War era.

Gross domestic product grew at a 0.1 percent annual rate, up from a previously estimated 0.1 percent drop, revised figures from the Commerce Department showed today in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a 0.5 percent gain. Federal military outlays declined at a 22 percent annual pace, the biggest decrease since 1972.

The pace of growth indicates Federal Reserve policy makers are likely to maintain asset purchases intended to boost the expansion, which may be curbed by automatic government spending cuts set to take effect tomorrow. At the same time, healing in the residential real estate market and sustained gains in consumer spending even as the payroll tax rose show the economy probably picked up at the start of this year.

“The growth rate is still very pitiful,” said Harm Bandholz, chief U.S. economist at UniCredit Group in New York, who projected a 0.2 percent increase. “At least, the awkward minus sign disappears.”

Fewer Claims

Fewer Americans than forecast filed applications for unemployment benefits last week, showing companies were looking beyond looming government spending cuts and maintaining staffing, another report showed today. Jobless claims decreased by 22,000 to 344,000 in the week ended Feb. 23, the Labor Department reported in Washington. The median forecast of 44 economists surveyed by Bloomberg called for 360,000 applications.

Other reports today showed that business activity in the U.S. unexpectedly expanded and consumer confidence improved to the highest level this year.

The MNI Chicago Report business barometer rose to 56.8 in February from 55.6 the prior month. Numbers greater than 50 signal expansion. The median forecast of 51 economists surveyed by Bloomberg was 54.

The Bloomberg Consumer Comfort Index climbed for a fourth straight week, reaching minus 32.8 in the period ended Feb. 24 from minus 33.4 in the prior period. The share of Americans with a positive view of the economy matched the highest since March 2008.

Stocks rose after the reports, with the Standard & Poor’s 500 Index advancing 0.2 percent to 1,519.59 at 9:53 a.m. in New York.

Economists’ Projections

Economists’ projections for GDP, the value of all goods and services produced, ranged from a 0.1 percent drop to a gain of 1 percent. The estimate is the second of three for the quarter, with the final release scheduled for the end of March when more information becomes available.

GDP grew 3.1 percent in the third quarter. For all of 2012, the economy expanded 2.2 percent after a 1.8 percent increase in the prior year.

The report reflected a revision to trade to now show a decline in the difference between exports and imports. The trade deficit shrank to $387.9 billion, the smallest since the first quarter of 2010, from $395.2 billion in the previous three months. The narrowing contributed 0.24 percent point to growth, a 0.49-point swing from the previously estimated drag.

That was partially offset by an even smaller gain in inventories than initially reported. Stockpiles grew at a revised $12 billion annual pace, down from a $20 billion rate estimated last month. The slowdown subtracted 1.55 percentage points from growth, 0.28-point more than reported last month.

Growth Signal

Depleted inventories may signal a first-quarter pickup in production.

Consumer purchases, the biggest part of the economy, rose at a 2.1 percent annualized rate, little changed from the previously estimated advance of 2.2 percent. The median forecast in the Bloomberg survey projected a 2.3 percent increase. Personal consumption added 1.47 percentage points to growth. It grew at a 1.6 percent pace in the third quarter.

Today’s report also revised income data for the third quarter. The gain in wages and salaries for the period from July through September from the prior three months was revised up by $6.8 billion to $39.3 billion.

After-tax income adjusted for inflation rose at a 0.7 percent annual rate in the third quarter, revised up from a previously estimated 0.5 percent advance. That resulted in shifting the fourth-quarter gain to 6.2 percent from 6.8 percent.

Gasoline Prices

Higher payroll taxes and rising gasoline prices are taking a chunk out of discretionary income this quarter, which may make it difficult to sustain household purchases at the same pace as in the fourth quarter.

Congress and President Barack Obama allowed the payroll tax to return to its 2010 level of 6.2 percent from 4.2 percent at the start of the year, which means an American who earns $50,000 is taking home about $83 less a month.

The average price of a gallon of regular gasoline at the pump rose to $3.79 on Feb. 26, the highest in more than four months, according to AAA, the biggest U.S. motoring group.

Growing demand for autos is helping to power household spending, which accounts for about 70 percent of the economy. Cars and light trucks sold at a 15.2 million annual rate in January after 15.3 million in December, according to data from Ward’s Automotive Group. Including November’s 15.5 million rate, auto sales over the past three months have been the strongest in five years. February data is scheduled for release tomorrow.

Automatic Cuts

Business spending has picked up after resolution of the so-called fiscal cliff at last year’s end, even amid negotiations to avert $1.2 trillion of automatic cuts over nine years that take effect tomorrow unless lawmakers and Obama agree on an alternative. The reductions are to be split almost evenly between defense and non-defense spending and are intended to shrink the federal budget deficit, which has exceeded $1 trillion in each of the past four years.

Capital investment was a bright spot last quarter as spending on equipment and software grew at a 11.3 percent rate, the fastest in more than a year. Orders for capital goods excluding defense equipment and aircraft, a proxy for future business investment, jumped 6.3 percent in January, the most since December 2011, Commerce Department figures showed yesterday. That follows a 0.3 percent drop in December.

Recovery in the housing industry may continue to help sustain the expansion. Growth in the home-improvement industry should keep pace with the overall economy, Robert Niblock, chief executive officer of Lowe’s Cos., the second-biggest home improvement retailer, said on a Feb. 25 earnings call.

‘Strengthening Growth’

“The fundamentals underlying drivers of industry growth -- mainly job gains and stable to growing housing -- should support a strengthening growth trajectory for the industry,” Niblock said.

The world’s largest economy is projected to grow at a 1.8 percent annual rate this quarter, according to economists surveyed by Bloomberg.

Fed Chairman Ben S. Bernanke has said that while the expansion is gaining traction, the need for a stronger economic recovery outweighs the potential costs in financial markets of continuing unprecedented monetary easing.

“Available information suggests that economic growth has picked up again this year,” Bernanke said earlier this week in testimony to the Senate Banking Committee in Washington.

Still, Bernanke cited an estimate from the nonpartisan Congressional Budget Office that the spending cuts known as sequestration will cause a 0.6 percentage-point reduction in growth this year.

‘Significant’ Burden

“Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant,” he said.

For all the concern in Washington about budget cuts, investors are signaling that the economy is strong enough to weather any reductions in spending, with home sales, consumer confidence and employment rebounding.

The S&P 500 Index has climbed 6.6 percent this year, better than the 5.6 percent gain for the MSCI All Country World Index. Yields on 10-year Treasuries have dropped nine basis points since Jan. 31 and were at 1.897 percent at 9:48 a.m. in New York. The U.S. Dollar Index, which tracks the currency against six of America’s biggest trading partners, is near a five-month high.