Fourth-quarter growth cut, but outlook improving

WASHINGTON (Reuters) - The U.S. government slashed its estimate for fourth-quarter growth, but tentative signs are emerging that the worst of the economy's slowdown may be over.

Gross domestic product expanded at a 2.4 percent annual rate, the Commerce Department said on Friday, down sharply from the 3.2 percent pace reported last month and the 4.1 percent logged in the third quarter.

Growth in the first quarter is expected to be even slower after an unusually cold winter disrupted activity. However, data on consumer sentiment, regional factory activity and housing on Friday indicated some thawing, which analysts hope will put the economy back on a strong growth trajectory.

Consumer sentiment rose modestly in February, while factory activity in the Midwest edged up after three months of slower growth. In addition, contracts to buy previously owned homes nudged up in January.

"That suggest some stabilization in economic activity," said Millan Mulraine, deputy chief economist at TD Securities in New York. "It bolsters the current narrative that the slowing in activity has been the result of the unseasonably cold winter conditions, which we expect to reverse in coming weeks."

Stocks on Wall Street rose on the mixed economic data, with the Standard & Poor's 500 index touching fresh all-time highs for a second straight day. Prices for U.S. government debt fell, while the dollar weakened against a basket of currencies.

Frigid temperatures have been blamed for a decline in retail sales, industrial production, residential construction, home sales and a sharp braking in hiring early this year.

The Federal Reserve, which has been cutting back on the amount of money it injects into the economy through monthly bond purchases, views the recent soft patch as temporary.

Fed Chair Janet Yellen told lawmakers on Thursday that the cold weather had played a role in the weakening data.

Yellen said, however, that it would take a "significant change" to the economy's prospects for the Fed to suspend its plans to wind down its bond buying.

STILL ABOVE TREND GROWTH

It is not unusual for the government to make sharp revisions to GDP numbers, as it does not have complete data when it makes its initial estimates. In fact, the latest figures will be subject to revisions next month as more information is received.

The revision left GDP just above the economy's potential growth trend, which analysts put somewhere between a 2 percent and 2.3 percent pace. Even with the revision, the second-half growth pace was a stellar 3.3 percent and a jump from 1.8 percent in the first six months of the year.

"It looks like the economy is settling into a 2 percent growth world. Not good enough," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, made up a large chunk of the revision after retail sales in November and December came in weaker than assumed.

Consumer spending was cut to a 2.6 percent rate, still the fastest pace since the first quarter of 2012. It had previously been reported to have grown at a 3.3 percent pace.

It contributed 1.73 percentage points to GDP growth, down from the previously reported 2.26 percentage points. As a result, final domestic demand was lowered two-tenths of a percentage point to a 1.2 percent rate.

Despite the first quarter's weak start, economists remain optimistic that growth this year will be the strongest since the recession ended almost five years ago. For all of 2013, the economy grew 1.9 percent.

An uptick in inflation also accounted for the downgrading of GDP growth in the fourth quarter. A price index in the GDP report rose at a 1.0 percent rate, instead of the previously reported 0.7 percent rate.

A core measure that strips out food and energy costs increased at a 1.3 percent rate, revised up from a 1.1 percent pace.

Trade weighed on fourth-quarter revisions as well, after a fall in exports in December resulted in a bigger trade deficit in the fourth quarter than the government had initially assumed.

Trade's contribution to growth was lowered to 0.99 percentage point from 1.33 percentage points. It was still the largest contribution to GDP growth since late 2010.

Inventories, previously reported to have risen by $127.2 billion in the fourth quarter, were revised down to $117.4 billion. The rise in the stocks of unsold goods was still the largest since early 1998 and followed a gain of $115.7 billion in the third quarter of 2013.

The contribution to growth from inventories, which the government put at 0.42 percentage point a month ago, was revised down to only 0.14 percentage point. Excluding inventories, the economy grew at a 2.3 percent rate, revised down from a 2.5 percent pace.

Government spending was also revised down, but the impact was offset by upward revisions to investment in residential construction, nonresidential structures and business spending on equipment.

(Reporting by Lucia Mutikani; Editing by Paul Simao)