The U.S. economy grew at a 3.1 percent annual rate in the fourth quarter, led by a jump in consumer spending that will be hard to match early in the year as energy prices surge. The revised increase in gross domestic product compares with a 2.8 percent estimate issued last month, figures from the Commerce Department showed today in Washington. Earnings at financial firms led a 2.3 percent increase in corporate profits from October to December that capped the biggest annual gain in six decades. Surging oil prices sparked by turmoil in the Middle East may erode consumers’ purchasing power, and supply constraints caused by the tragedy in Japan may slow the pace of recovery this quarter. At the same time, lean inventories and growing demand from emerging economies will probably keep benefiting companies like Caterpillar Inc. (CAT), sustaining the expansion. “We’re seeing the effects of rising gasoline prices and we’re going to see a negative impact from the earthquake start to show up because of bottlenecks in the global supply chain,” Sal Guatieri, a senior economist at BMO Capital Markets Inc. in Toronto, said before the report. “Recent data suggests the expansion is a little softer than anticipated.” GDP was projected to expand at a 3 percent pace in the fourth-quarter, according to the median forecast in a Bloomberg News survey of 81 economists. Estimates ranged from 2.7 percent to 3.4 percent. The world’s largest economy grew at a 2.6 percent pace in the previous three months. 2010 Growth For all of 2010, the economy expanded 2.9 percent, the most in five years, after shrinking 2.6 percent in 2009. Company earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, rose by $38.2 billion from the third quarter. Domestic profits at financial corporations increased by $57.7 billion, while earnings at non-financial businesses fell by $10.1 billion. Earnings from operations overseas dropped by $9.4 billion. For all of 2010, profits climbed 29 percent, the biggest annual gain since 1948. Consumer spending, about 70 percent of the economy, rose at a 4 percent pace last quarter, the most since the same three months in 2006, compared with 4.1 percent previously estimated and a 2.4 percent rate in the third quarter. The gain in consumer spending compared with a 4.1 percent median forecast in the Bloomberg survey. Purchases added 2.8 percentage points to growth. Business Spending The upward revision to growth was paced by a bigger increase in business investment and a smaller slowdown in stockpiling than previously estimated. Spending on equipment and software climbed at a 7.7 percent annual last quarter, up from last month’s 5.5 percent estimate. Inventories last quarter were stocked at a $16.2 billion pace, compared with a previously reported $7.1 billion rate and down from a $121.4 billion rate in the third quarter. While leaner stockpiles help set the stage for faster growth, they are also a double-edged sword when supply chains are disrupted by natural disasters like the earthquake and tsunami in Japan. General Motors Co. has idled a pickup factory in Shreveport, Louisiana, because of parts shortages, and Boeing Co. is also among companies dependent on getting supplies from the Asian nation. Less Inflation The Federal Reserve’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.4 percent annual pace, the smallest increase in data going back to 1959 and less than the 0.5 percent previously estimated. The Fed’s longer term projection for inflation is a range of 1.6 percent to 2 percent. Rising oil and food costs may push up the prices of other goods and services. Oil that topped $106 a barrel this week and a labor-market recovery that is taking time to develop threaten to restrain consumer spending. Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., on March 11 downgraded his first quarter growth estimate to 2.5 percent from 3.5 percent, citing weaker-than-forecast trade deficit caused by a jump in imports and retail sales data. The manufacturing industries that account for 11 percent of the economy are likely to remain at the forefront of the recovery on growing demand from abroad and the need to replenish inventories. Caterpillar, the world’s largest maker of construction equipment, is seeing a “slow, steady increase” in demand in North America, its Chief Executive Officer Doug Oberhelman said this week at an industry conference in Las Vegas. “Business is booming outside the U.S.,” Oberhelman said. Job Gains Improving demand is encouraging some companies to take on more employees, cushioning earlier cutbacks. General Motors Co. (GM) will recall the last of its laid-off workers by September, United Auto Workers Vice President Joe Ashton said this week. “We only have about 2,000 people now laid off and those people will all be back to work in September,” Ashton, who handles negotiations with GM, told union workers at the UAW’s Special Convention on Collective Bargaining in Detroit. The government’s extension in December of Bush era tax cuts and cuts to payroll taxes of 2 percentage points will help underpin spending and hiring, while another measure that lets firms depreciate 100 percent of capital expenditures over the course of 2011 may spur business investment. Today’s GDP estimate is the last of three for the quarter. To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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