U.S. economic growth slowed in the fourth quarter, but not as big as initially thought, with businesses less aggressive in their efforts to decrease unwanted inventory, which could hurt production in the first quarter of 2016.
The Commerce Department said Friday that gross domestic product, the broadest measure of goods and services produced across the economy, advanced at a 1.0% seasonally adjusted annual rate in the fourth quarter. The institution last month had expected the fourth quarter GDP increase of 0.7%.
Businesses accumulated $81.7 billion worth of inventory in the fourth quarter rather than the $68.6 billion reported last month. The largest contributors to the upward revision to inventory investment were retail trade and mining, utilities and construction.
As a result, inventories subtracted only 0.14% from GDP growth instead of the previously reported 0.45%.
The bigger inventory build is bad news for the next quarter GDP growth as it means businesses will have little incentive to place new orders, which will continue to hold down production.
"The weaker drag from inventories in the fourth quarter means that any rebound in the first quarter could be slightly more modest than we previously expected," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
"Nevertheless, it still appears that first-quarter GDP growth is on track to rebound to a very healthy 2.5 percent annualized or higher, which should dampen any concerns about an imminent recession."
This Friday’s revision showed consumer spending was slightly lower than initially expected. But there was far less of a drag on growth from the decrease in companies’ inventory investment than first thought. The change in private inventories was revised to a 0.14 percentage point drag from an initial read of a 0.45 percentage point drag on growth.
However, Friday’s report show consumer spending—which drives two-thirds of U.S. economic output—advanced at a slower pace than previously expected in the holiday season. The updated reading for personal consumption indicated it rose 2.0% in the fourth quarter, down from an initial print of 2.2% and below growth of 3% in the third quarter. But, despite cautious spending in the final quarter, full-year consumer spending grew 3.1%, the fastest pace in a decade.