The economy grew at a solid 3.8 percent annual rate in the final quarter of 2004 — stronger than previously estimated and an encouraging sign that the business expansion was firmly entrenched at the start of the new year.
The new reading on gross domestic product, released by the Commerce Department Friday, was better than the government's initial calculation made a month ago. That estimate showed the economy growing at a 3.1 percent pace.
The improvement reflected more robust spending by businesses on capital equipment and to build up inventories of goods. The trade deficit also was less of a drag on fourth-quarter growth than initially thought.
In more good news for the economy, sales of existing homes edged down a slight 0.1 percent in January as attractive mortgage rates continued to support strong demand in the housing market, the National Association of Realtors reported Friday
GDP, the broadest barometer of the country's economic health, measures the value of all goods and services produced within the United States.
The new fourth-quarter GDP figure also was better than the 3.5 percent growth rate that economists had forecast in advance of Friday's release.
Although economic growth in the final quarter of last year was a bit slower than the 4 percent pace measured in the third quarter, the performance was still solid.
For all of 2004, the economy expanded by 4.4 percent, the best showing in five years. This annual estimate was the same as first reported last month.
Federal Reserve Chairman Alan Greenspan, delivering the Fed's economic outlook to Congress last week, struck a fairly positive note about the economy's performance.
"All told, the economy seems to have entered 2005 expanding at a reasonably good pace, with inflation and inflation expectations well anchored," he said.
Against that backdrop, Fed policy-makers who have boosted short-term interest rates six times since June are expected to raise them again on March 22.
For the current January-to-March quarter, the economy is expected to grow at a rate of around 4 percent, according to some economists' projections.
Analysts are hoping that with the economy moving ahead solidly, companies will feel more inclined to step up hiring in the months ahead. The jobs market was slower to recover from the 2001 recession than other parts of the economy. The nation's payrolls expanded by a respectable 2.2 million last year.
President Bush wants to see the economy on firm footing, especially as he tries to sell the country an overhaul of Social Security. A cornerstone of his plan would allow workers to set up private investment accounts in stocks and bonds. Democrats largely don't like the idea and some Republicans in Congress are wary as well.
In the GDP report, businesses clearly did their part to carry the economy in the final quarter of last year. That's especially encouraging because it was deep cuts in capital spending by companies that helped to push the country into recession and had restrained the economy's subsequent recovery.
Businesses boosted spending on equipment and software at a brisk, 18 percent rate in the fourth quarter. That was up from a previous estimate of a 14.9 percent growth rate in such investment, and exceeded the 17.5 percent pace of spending in the third quarter.
Business investment in new plants and other buildings, as well as in building up supplies of good also were stronger in the fourth quarter than previously thought.
Stronger spending on residential projects also contributed to the higher reading on fourth-quarter GDP.
Consumer spending, grew at a 4.2 percent pace in the final quarter. That was down a bit from the government's initial estimate as well as the 5.1 percent growth rate registered in the third quarter. Still, the fourth-quarter's showing was solid.
Analysts are pleased that businesses are doing more to contribute to economic growth. During the recovery, the economy was largely carried by consumers. If businesses feel good about economic prospects, they may also beef up hiring, an important ingredient to consumers' and the economy's well being.