US economic growth trimmed, consumers more upbeat

WASHINGTON, Feb 26 (Reuters): US consumer confidence hit a three-year high in February, suggesting the economy remained on a solid footing despite soaring gasoline prices. The rise in sentiment was a hopeful sign for the economic recovery after the government said on Friday that growth in the fourth quarter was not as robust as it previously estimated. The Thomson Reuters/University of Michigan survey's index on consumer sentiment climbed to 77.5, the highest since January 2008, from 74.2 in January -- indicating consumers were weathering higher gasoline prices for now amid optimism about the labor market. "Consumers do appear to be taking the rise in gasoline and food prices in stride, which is very encouraging," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "I wouldn't be surprised if we had a few bumps along the road, but I do think the consumer will continue to play an important role in the recovery." Gross domestic product grew at an annualized rate of 2.8 per cent in the fourth quarter, the Commerce Department said, a downward revision from its initial 3.2 per cent estimate a month ago. Economists had expected GDP growth to be revised up to a 3.3 per cent pace. Political unrest in Libya and parts of the Middle East has pushed crude prices above $100 a barrel, sparking fears among some economists that growth could slow this year. Economists at JPMorgan lowered their forecast for first-quarter GDP growth to 3.5 per cent from 4.0 per cent, citing softer-than-expected consumer spending and possible headwinds from the oil price spike. Harsh winter weather is also seen as a factor weighing on growth. Richmond Federal Reserve Bank President Jeffrey Lacker said on Friday he did not think oil above $100 a barrel or gasoline over $3 a gallon would derail the U.S. recovery. "So far this seems quite manageable," he said on CNBC. "The real danger is in inflation psychology. I think as long as expectations are managed well, we're going to get through this without a burst in inflation." The national price for gasoline rose almost five cents this week to an average $3.19 a gallon, the most expensive since October 6, 2008. Turmoil in Libya and fears the oil spike could dent growth drove investors into safe-haven U.S. government bonds, pushing prices up and yields lower. Brent crude, however, eased off 2-1/2-year highs, helping U.S. stocks to rebound after a week-long sell-off. The dollar rose against a basket of currencies. The economy expanded at a 2.6 per cent rate in the third quarter and grew 2.8 per cent for the whole of last year. The government's measure of fourth-quarter growth was lowered to reflect a contraction in government spending that was more than double the initial estimate. Spending by state and local governments, which are under heavy budgetary pressures, shrank 2.4 per cent. In all, government spending lopped 0.31 per centage point from GDP growth. Growth in consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- was trimmed to a 4.1 per cent rate from 4.4 per cent. It was still the fastest since the first three months of 2006 and an acceleration from the third quarter's 2.4 per cent rate. "It validates the view that the most significant player in the economy is gradually coming back, but is doing so in a restrained fashion," said Patrick O'Keefe, director of economic research at J.H. Cohn in Roseland, New Jersey. The pace of growth was too slow to do much to lower the unemployment rate, which fell during the quarter from 9.6 per cent to 9.4 per cent. It fell again in January to reach 9 per cent. Fed officials have been concerned the economy is expanding too slowly to bring unemployment down significantly. They are likely to view high oil prices primarily as a risk to growth rather than a long-term inflation concern. Fed Chairman Ben Bernanke testifies to Congress on Tuesday and Wednesday, and analysts think he is unlikely to suggest much appetite within the central bank for scaling back a $600 billion government bond-buying program launched in November. The GDP report also showed some upward revisions to business investment, but there were surprise downward tweaks to spending on equipment and software. It also confirmed that the accumulation of inventories by businesses slowed sharply in the fourth quarter, taking a big bite out of GDP growth. Excluding inventories, the economy expanded at a 6.7 per cent pace rather than 7.1 per cent. The expansion marked the biggest increase in domestic and foreign demand since 1998. In contrast, domestic purchases grew at a much more moderate 3.1 per cent rate.