By Lucia Mutikani
WASHINGTON (Reuters) - Strong household spending and robust exports kept the U.S. economy on solid ground in the fourth quarter, but stagnant wages could chip away some of the momentum in early 2014.
Gross domestic product grew at a 3.2 percent annual rate, the Commerce Department said on Thursday, in line with economists' expectations.
While that was a slowdown from the third-quarter's brisk 4.1 percent pace, it was a far stronger performance than had been anticipated earlier in the quarter and welcome news in light of some drag from October's partial government shutdown.
"The economy was firing on almost all cylinders as 2013 came to a close. For today, the sun is out and shining," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
Earlier in the quarter many economists were expecting a growth pace below 2 percent given that an inventory surge accounted for much of the increase in the July-September period.
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Growth over the second half of the year come in at a 3.7 percent pace, up sharply from 1.8 percent in the first six months of the year. It was the biggest half-year increase since the second half of 2003.
Stocks on Wall Street pushed higher, rebounding from the previous session's decline on the back of the report. U.S. Treasury debt prices fell, while the dollar rose against a basket of currencies.
Consumer spending was the main driver of fourth-quarter growth, but there was also a strong boost from trade. Business investment also lent support as did the restocking of warehouses, but not at the same scale as in the third quarter.
The advance fourth-quarter GDP was released a day after the Federal Reserve said "growth in economic activity picked up in recent quarters."
The Fed on Wednesday announced another reduction to its monthly bond purchases and appeared to shrug off a surprise sharp slowdown in job growth in December.
Consumer spending rose at a 3.3 percent rate, the strongest since the fourth quarter of 2010. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, advanced at a 2 percent pace in the third quarter.
Businesses accumulated $127.2 billion worth of inventories, the most since the first quarter of 1998, adding 0.42 percentage point to GDP growth. Inventories had risen $115.7 billion in the third quarter, contributing 1.67 percentage points to output.
Excluding inventories, the economy grew at a 2.8 percent rate, up from the third-quarter's 2.5 percent rate.
GRAPHICS:
U.S. GDP growth: https://bsmedia.business-standard.comlink.reuters.com/tut99t
Contributors to GDP: http://link.reuters.com/gyd56v
U.S. jobless claims: http://link.reuters.com/xew34t
Pending home sales: http://link.reuters.com/tax34t
STRONG DEMAND
The sturdy increase in demand should put the economy on a stronger growth path this year. However, stagnant wages could take some edge off consumer spending early in the year.
A feared inventory correction, which did not materialize in the fourth quarter, is now likely to show up in the first three months of the year and weigh on growth, economists say.
In addition, business investment is expected to moderate, given a surprise tumble in orders for capital goods excluding defense and aircraft in December. The strong export performance is unlikely to be repeated.
Even so, a lessening of the fiscal austerity that gripped Washington last year should keep the economy on a firmer growth path. Growth for the whole of this year is forecast at 2.9 percent, up from last year's 1.9 percent.
"The report indicates some favorable developments in the private sector, and while growth this quarter may step down some, prospects remain good for a modestly above-trend outcome," said Michael Feroli, an economist at JPMorgan in New York.
Wage growth has been listless as the economy deals with slack in the labor market. In a separate report, the Labor Department said first-time applications for state unemployment benefits rose 19,000 last week to 348,000.
Consumption in the fourth quarter came at the expense of saving. The saving rate slowed to 4.3 percent in the fourth quarter from 4.9 percent in the prior period.
Income at the disposal of households after accounting for inflation rose at a tepid 0.8 percent rate in the fourth quarter. That was a sharp slowdown from the 3.0 percent pace in the third quarter.
Sluggish wages kept inflation pressures benign in the fourth quarter. A price index in the GDP report rose at a 0.7 percent rate, decelerating from the third-quarter's 1.9 percent pace.
A core measure that strips out food and energy costs increased at a 1.1 percent rate after advancing at a 1.4 percent pace in the July-September period.
The economy in the last quarter also got a boost from exports, thanks to firmer global growth. Exports rose at their fastest pace in three years. That, together with declining petroleum imports narrowed the trade deficit. Trade contributed 1.33 percentage points to GDP growth.
Business spending on equipment accelerated at a 6.9 percent rate in the fourth quarter after rising at only a 0.2 percent pace in the prior three months.
There was a decline in business spending on nonresidential structures in the fourth quarter.
A run-up in mortgage rates, which held back home sales and renovations, saw residential investment falling for the first time since the third quarter of 2010. Home sales have been on the back foot in recent months and that trend is likely to persist for a while as the market adjusts to higher loan rates.
A third report showed contracts to buy previously owned homes tumbled 8.7 percent in December to a two-year low.
Government spending contracted at a 4.9 percent pace, also reflecting the 16-day partial shutdown of the federal government in October and a plunge in defense spending.
The Commerce Department said the shutdown had reduced GDP growth by 0.3 percentage point, through reduction in hours worked by federal employees.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)