U.S. economy expands 3.2%

Consumer spending fuels GDP growth in fourth quarter

The U.S. economy expanded at a 3.2 percent pace in the fourth quarter as spending climbed the most in three years, the Commerce Department said Thursday.

Consumer spending rose 3.3 percent in the quarter, a significant acceleration from 2 percent spending growth in the third quarter. Consumer spending is particularly important because it accounts for about 70 percent of the economy.

Stocks rebounded on the news, trimming the worst January loss in four years. The Dow Jones industrial average rose 109.82 points to 15,848.61.

The pickup in demand allowed the economy to overcome cutbacks in government outlays caused by the partial federal shutdown in October. Diminishing fiscal challenges and progress in the labor market will probably sustain consumer and corporate demand in 2014, economists say, helping explain why the Federal Reserve decided Wednesday to keep paring stimulus.

“There is a fair amountof strength in the economy,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Mass. “Consumer spending is on solid ground. We’re seeing other engines of growth picking up - capital spending is rebounding, exports are up.”

Paul Ashworth, chief U.S. economist at Capital Economics, said he thinks growthwill slow to an annual rate of around 2.5 percent in the first half of this year, in part because businesses will slow their stockpiling. But Ashworth said even this reduced growth rate should help further lower the unemployment rate and ensure that the Fed will keep reducing its stimulus this year. The national unemployment rate is now 6.7 percent.

Jennifer Lee, senior economist at BMO Capital Markets, said the strength in the October-December quarter supported her view that the economy would grow at an annual rate of 2.9 percent this year.

Also on Thursday, a report from the Labor Department showed applications for unemployment benefits rose more than forecast last week to the highest level in more than a month, partly reversing a postholiday slump.

Unemployment claims climbed by 19,000 to 348,000 in the period ended Saturday, which included a federal holiday, according to Labor Department data. The reading was the highest since mid-December.

For all of 2013, the economy expanded 1.9 percent after a 2.8 percent increase in the prior year.

The GDP report reflected a bigger decline in federal government spending and a downturn in home construction. The pickup in consumer purchases was accompanied by stronger business investment in equipment and an improvement in the nation’s trade deficit.

Government spending fell at a 4.9 percent pace, subtracting 0.9 percentage point from overall growth. Spending by federal agencies decreased at a 12.6 percent rate. For all of 2013, federal government spending declined 5.1 percent, the most since 1971.

The 16-day partial shutdown of the federal government in October held back economic growth during the quarter. The Bureau of Economic Analysis estimated the effect of the reduction of hours worked cut GDP by about 0.3 percentage point.

Stockpiles grew more in the fourth quarter than in the previous three months, contributing to economic growth. The $127.2 billion pickup from October through December was the biggest since 1998 and followed a $115.7 billion increase in the third quarter. It marked the biggest back-to-back quarterly increases on record.

The trade deficit narrowed to $370.1 billion, as exports increased more than imports. The smaller gap added 1.33 percentage points to GDP growth, the most since the second quarter of 2009.

Corporate spending on equipment advanced at a 6.9 percent annualized pace, adding 0.4 percentage point. Intellectual property spending rose at a 3.2 percent rate.

Residential construction decreased at a 9.8 percent annualized rate, subtracting 0.3 percentage point from growth.

Information for this article was contributed by Shobhana Chandra, Ian King and Kristy Scheuble of Bloomberg News and by The Associated Press.

Business, Pages 27 on 01/31/2014

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