US factory, income data support outlook

The US economy grew slightly faster than initially thought in the fourth quarter and a gauge of factory activity in the Midwest hit a 10 month-high in February, pointing to underlying strength in the economy. Gross domestic product expanded at a 3 percent annual rate, the quickest pace since the second quarter of 2010, the Commerce Department said on Wednesday in its second estimate.
The reading, which was up from the 2.8 percent pace the government reported last month and reflected modest upward revisions to almost all components of GDP, added to the recent run of fairly upbeat economic reports. ----- GDP growth revised to 3pc from 2.8pc
The tone of the GDP report was further bolstered by upward revisions to income and savings data, which should help support consumer spending in the face of rising gasoline prices. "Growth is still on the right path, but we are not going to see any acceleration. Income was revised up so it removed one of the headwinds to growth in the beginning of the year," said Yelena Shulyatyeva, an economist at BNP Paribas in New York.
A steady stream of fairly upbeat data ranging from employment to manufacturing has caused analysts to temper expectations of a sharp pullback in growth this quarter. First-quarter GDP is seen between 2 and 2.5 percent.
In another report, the Institute for Supply Management-Chicago said its measure of manufacturing activity in the Midwest region rose to a 10-month high of 64 in February from 60.2 in January. A reading above 50 indicates expansion in the regional economy. Activity was boosted by a jump in new orders to a near year-high and a backlog build-up.
The report, which also showed regional factory employment at its highest level since May 1984, was in stark contrast with a sharp decline in demand for long-lasting manufactured goods in January, reported by the government on Tuesday. "Durable goods orders are usually weaker in the first month of the quarter and that is particularly noticeable in January. Manufacturing is doing well," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania.
Economists have raised their forecasts for the Institute for Supply Management's report on overall manufacturing activity to be released on Thursday. The ISM index of national manufacturing is now expected to be around 55, up from the 54.5 forecast in a Reuters poll.
Retail gas prices have jumped 12.6 percent, or 42 cents a gallon, since the start of the year and averaged $3.78 a gallon in the week through Monday. Recent gains in the labour market are helping the economy. The GDP report showed consumer spending - which accounts for about 70 percent of US economic activity - grew at a 2.1 percent rate in the fourth quarter, revised up from 2 percent.
Real disposable income growth was revised up to a 1.4 percent rate from 0.8 percent. The saving rate was raised to a much stronger 4.5 percent rate from 3.7 percent. There were also modest upward revisions to business investment in capital goods, spending on home building and non-residential structures was modestly weak. Still, the pace of business spending was the slowest since the 2007-09 recession ended.
While a rebuilding of inventories added a hefty 1.88 percentage points to GDP in the last quarter, the increase was revised down to $54.3 billion from $56.0 billion. Excluding inventories, the economy grew at a 1.1 percent rate, up from the 0.8 percent rate initially reported, but a sharp step-down from the third quarter's 3.2 percent pace.
A price index for personal spending rose at a 1.2 percent rate instead of 0.7 percent. A core measure that strips out food and energy costs rose at a 1.3 percent rate instead of 1.1 percent. The Fed would prefer to see this measure nearer its 2 percent inflation target.