GDP Up at 3.8% Pace in Quarter

The U.S. economy ended 2004 with brisk momentum on the strongest surge in corporate profits in three years, the government reported Wednesday, but upward pressure on prices appeared to be growing.

Gross domestic product, the measure of total output within U.S. borders, grew at a 3.8% annual pace in the fourth quarter, the same as estimated a month ago, the Commerce Department said in a final estimate of GDP performance.

That was slightly under the 4% pace Wall Street analysts had forecast but still reflected healthy growth, only slightly below the third quarter’s 4% rate.

Most private-sector analysts expect steady expansion during 2005 but some drag from rising oil prices as the year wears on.

The revisions in the final estimate of fourth-quarter GDP were minor, but they included a slight bump up in a key price measure, which set nerves on edge in financial markets.

“The upward revision shows that the inflation pickup happened earlier than we thought,” said Ken Peng, an economist at Citigroup in New York. “Prices outside commodities were already starting to flare up in the fourth quarter.”

The department noted that business inventories grew at a slightly smaller annual rate of $47.2 billion instead of $51 billion estimated a month earlier. But that was largely offset by upward revisions to exports and spending on costly durable goods, including new cars.

Corporate profits after taxes climbed 12.5% in the fourth quarter to a record seasonally adjusted annual rate of $973 billion -- the strongest increase since an 18.9% surge in the fourth quarter of 2001.

The profit measure is adjusted for the value of existing inventories and for depreciation of capital equipment, so it reflects earnings from current production. Profits had fallen 4.2% in the third quarter after a series of hurricanes wreaked havoc in several Southeastern states.

A price index favored by Federal Reserve Chairman Alan Greenspan -- personal consumption expenditures excluding food and energy -- gained at a 1.7% annual rate in the fourth quarter, up from a 1.6% estimate a month ago and nearly twice the 0.9% third-quarter rate of increase.

For all of 2004, GDP expanded 4.4%. That was the strongest growth in five years, since a 4.5% advance in 1999, and was well ahead of the 3% posted for 2003.

A recent survey by Blue Chip Economic Indicators, a consensus of leading economists, predicted that GDP growth would ease to 3.7% this year and 3.4% in 2006 as the Fed extended a campaign to restrain price pressures by gradually ratcheting interest rates higher.