US economy shows some muscle, housing still weak

WASHINGTON (REUTERS) - The US economy grew a bit faster than previously estimated in the fourth quarter and new claims for jobless aid dropped to a near four-month low last week, suggesting the economy has plenty of momentum to break out of its winter chill.

Housing, however, will probably take a while to escape from its recent slump as contracts to buy previously owned homes fell to their lowest level in almost 2-1/2 years in February.

Still, economists said on balance the data on Thursday presented a better growth picture. "The economy looks in a better place than it did just 24 hours ago," said Chris Rupkey, an economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Gross domestic product expanded at a 2.6 per cent annual rate in the final three months of last year, the Commerce Department said, up from the 2.4 per cent pace it reported last month.

Although the revised pace was still significantly slower than the 4.1 per cent rate logged in the third quarter, the composition of growth suggested underlying strength.

Consumer spending, which accounts for more than two thirds of U.S. economic activity, was raised sharply higher and the pace of restocking by businesses was not as robust as previously estimated. Business investment in equipment was a bit stronger and the drop in government outlays was a little less pronounced.

A separate report from the Labor Department showed initial claims for state unemployment benefits dropped 10,000 to a seasonally adjusted 311,000 last week, the lowest level since November. Economists had expected claims to rise to 325,000.

The four-week average, which gives a better picture of underlying labor market conditions as it irons out week-to-week volatility, hit its lowest level in six months.

U.S. financial markets were little moved by the data as investors kept a wary eye on the situation in Ukraine.

In another report, the National Association of Realtors said its pending home sales index, based on contracts signed last month, fell 0.8 per cent to its lowest level since October 2011.

Housing has been hit by cold weather, a tight supply of properties for sale and higher mortgage rates. High house prices are also sidelining potential buyers, especially those venturing into the market for the first time.

It was the eighth consecutive decline in newly signed contracts, and it suggested home resales would likely fall again in March.

"The tightening of financial conditions last summer did have a negative impact and it is broader than just the weather-related weakness," said Yelena Shulyatyeva, an economist at BNP Paribas in New York. "The contract signings data imply continued weakness in existing home sales this spring." The 30-year fixed mortgage rate peaked at 4.49 per cent in September. While it dropped to about 4.30 per cent in February, it is still a full per centage point higher than it was in 2013.

Despite the housing market's struggles, the Fed is expected to wind down its monthly bond-buying program by year-end, and begin to push interest rates higher sometime next year.

Growth in the first quarter is expected to have slowed to a pace of around 2 per cent, held back by cold weather, the expiration of long-term unemployment benefits, cuts to food stamps and businesses placing fewer orders with manufacturers as they work through a pile of unsold goods.

The revision to fourth-quarter growth, however, offered hope for an acceleration as these temporary factors fade.

"The recovery is finally self-sustaining," said Gus Faucher, senior economist at PNC Financial Services in Pittsburgh. "The economy should quickly pick back up again in the second quarter." Growth in consumer spending was revised up to a 3.3 per cent rate from 2.6 per cent. It was the strongest gain in consumer spending in three years and it added more than two per centage points to GDP growth.

An upward revision to spending on health care was the main driver behind the new estimate, although spending on utilities and long-lasting manufactured goods was also bumped higher.

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