U.S. Surprises With 1.4% Growth

WASHINGTON-- The U.S. economy didn't falter as badly in the final quarter of last year as first thought. A new reading showed growth at a 1.4 percent pace -- still slow but twice as fast as the government previously estimated.

While economists welcomed the upward revision to gross domestic product reported by the Commerce Department on Friday, they said it didn't change the basic picture of the $10.6 trillion economy: It is listless.

"I think the economy is rudderless," said Richard Yamarone, economist at Argus Research Corp.

Although Yamarone believes that the economy will stay in a funk for much of 2003, most other analysts are hopeful the recovery will get noticeably stronger in the second half of the year.

In fact, many believe the economy is already doing better in the current January-March quarter, with estimates of growth at 2.5 percent or more.

If a war breaks out with Iraq, though, economic activity would probably be crimped -- initially -- if consumers and business turn more cautious, economists said.

The government first estimated that GDP in the fourth quarter of 2002 grew at an annual rate of 0.7 percent. The revised reading is based on more complete data.

GDP measures the total value of goods and services produced within the United States and is considered the best barometer of the economy's health.

The major factors in the upward revision were stronger investment by businesses in building up stockpiles of unsold goods and a slight boost to consumer spending.

The fourth-quarter estimate still represented a big slowdown from the third quarter's brisk 4 percent pace.

Worries about possible war with Iraq, the roller-coaster stock market and a lackluster job market are weighing heavily on the economy. The biggest factor holding back the recovery is the reluctance of businesses to make big commitments in hiring and in capital spending.

President George W. Bush -- not wanting the economy's woes to linger into his 2004 re-election campaign -- has proposed a 10-year, $1.3 trillion tax-cut package to help energize recovery.

But Federal Reserve Chairman Alan Greenspan says the package isn't needed now. He is hopeful that when uncertainties lift, businesses will be much more willing to step up investment and hiring.

Economists said the Fed is likely to hold interest rates at the current decades-low rate of 1.25 percent at its next meeting in March.

In the fourth quarter, stronger inventory building by businesses resulted in a 0.24 percentage point boost to GDP rather than the 0.56 point reduction estimated a month ago.

Consumer spending, which accounts for two-thirds of all economic activity in the United States, increased at a rate of 1.5 percent in the fourth quarter. That was a slight improvement over the 1 percent pace previously reported but still was a big pullback from the robust 4.2 percent rate in the third quarter.

In some encouraging news, businesses, after cutting capital investment for eight straight quarters, boosted such spending at a rate of 2.5 percent in the fourth quarter, better than the 1.5 percent previously reported.

The new estimate marked the best showing since the third quarter of 2000.

All of the strength, however, came from investment in new equipment and software. Companies continued to cut investment in new plants and other buildings.

"I think there are signs that capital spending is coming out of its torpor," said Tim O'Neill, chief economist at the Bank of Montreal. "But it is still sleepy," he added.

The housing market -- one of the bright spots of the economy -- continued to help spur growth. Spending on residential projects grew at a 9.4 percent rate in the fourth quarter, stronger than the 6.8 percent pace previously reported.