GDP Growth Estimate Cut to 2.2%

The U.S. economy didn't surge at the end of 2006 as originally thought, according to new government data showing a sharp downward adjustment to fourth-quarter growth partly because of lower business inventory investment.

Gross domestic product increased at a 2.2% annual rate October through December, the Commerce Department said Wednesday in its first revision to GDP growth during the last three months of 2006.

The government initially estimated GDP grew by 3.5% in the fourth quarter. The new estimate of a 2.2% seasonally adjusted gain meant the economy was just a little stronger than in the third quarter, when GDP rose 2.0%.

Lower inventory investment, higher imports and slightly weaker consumer spending led to the downward revision to GDP, which is a measure of all goods and services produced in the economy. The adjustment didn't surprise Wall Street; the median estimate of 20 economists surveyed by Dow Jones Newswires was a 2.2% increase.

The data showed businesses increased inventories by only $17.3 billion; originally, Commerce estimated a $35.3 billion increase. Companies had elevated stocks $55.4 billion in the third quarter. The accumulation of goods reduced fourth-quarter GDP by 1.35 percentage points. Originally, Commerce said inventories subtracted 0.71 percentage points to GDP.

Trade didn't give the economy as big a boost as originally reported. U.S. exports rose by 10.5%. Imports decreased 2.2%. Trade added 1.50 percentage points to GDP in the fourth quarter. Originally, exports were seen rising 10.0% and imports were estimated falling by 3.2%, with trade seen boosting GDP by 1.64 percentage points.

Third-quarter exports increased by 6.8% and imports climbed 5.6%.

Businesses decreased spending more than previously thought. Outlays fell 2.4% October through December, a decline sharper than the originally estimated 0.4% drop. Business spending rose 10.0% in the third quarter. Fourth-quarter investment in structures fell 0.8%. Equipment and software decreased 3.2%.

Fourth-quarter spending by consumers advanced 4.2%, down from a previously reported 4.4% increase but above the third quarter's 2.8% advance.

Consumer spending accounts for the lion's share of economic activity - about two-thirds. It contributed 2.88 percentage points to GDP in the fourth quarter; the original estimate was a contribution of 3.05 percentage points.

Purchases of durable goods rose 4.4% in October through December, below the previously reported 6.0% increase. Durables increased 6.4% in the third quarter.

Durable goods are expensive items designed to last at least three years, such as cars.

Fourth-quarter non-durables spending rose by 6.0%. Services spending went 3.2% higher.

Residential fixed investment, which includes spending on housing, plunged by 19.1% in the fourth quarter, a slightly smaller drop than the originally estimated 19.2%. Third-quarter spending fell by 18.7%.

Real final sales of domestic product, which is GDP less the change in private inventories, climbed 3.6%. The original estimate was a 4.2% increase. Third-quarter sales rose 1.9%.

Federal government spending increased by 4.4%, revised down from an initially estimated 4.5% increase. Third-quarter spending rose 1.3%. State and local government outlays increased 2.6%.

Revisions to inflation gauges within the report were mixed.

The government's price index for personal consumption decreased 0.9%, below the previously estimated 0.8% decline and below the third quarter's 2.4% climb. The PCE price gauge excluding food and energy rose 1.9%, below the previously estimated 2.1% increase and below the third quarter's 2.2% climb.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, went up 0.2%, above the previously estimated 0.1% rise but below the third quarter's 2.2% climb. The chain-weighted GDP price index rose 1.7%, above the previously estimated 1.5% rise but below the third quarter's 1.9% climb.