WASHINGTON • US economic growth slowed in the fourth quarter, but not as sharply as initially thought, with businesses less aggressive in their efforts to reduce unwanted inventory, which could hurt output in the first three months of this year.

Gross domestic product increased at a 1 per cent annual rate instead of the previously reported 0.7 per cent pace, the Commerce Department said yesterday in its second GDP estimate. Economists polled by Reuters had expected that fourth-quarter GDP growth would be revised down to a 0.4 per cent pace.

The economy grew at a rate of 2 per cent in the third quarter and expanded by 2.4 per cent last year.

Businesses accumulated US$81.7 billion (S$114.7 billion) worth of inventory in the fourth quarter rather than the US$68.6 billion reported last month. The largest contributors to the upward revision were retail trade and mining, utilities and construction.

As a result, inventories subtracted only 0.14 percentage point from GDP growth instead of the previously reported 0.45 percentage point.

The bigger inventory build-up is bad news for first-quarter GDP growth as it means that 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 Mr Paul Ashworth, chief US 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 per cent annualised or higher, which should dampen any concerns about an imminent recession."

First-quarter GDP growth estimates are as high as a 2.5 per cent rate, but the risks are tilted to the downside amid slowing world economies, a strong US dollar and a recent global stock market sell-off that has tightened financial market conditions.

The upward revision to fourth-quarter GDP growth also reflected a smaller trade deficit than initially thought as imports contracted. The trade deficit subtracted 0.25 percentage point from GDP growth instead of the 0.47 percentage point reported last month.

Business spending on equipment contracted at a less steep 1.8 per cent rate last quarter, compared with the previously reported 2.5 per cent rate.

There was a small downward revision to consumer spending, which accounts for more than two thirds of US economic activity. It rose at a 2 per cent pace rather than the 2.2 per cent rate reported last month.

REUTERS