By TOM BARKLEY And JUDITH BURNS
U.S. economic growth accelerated to the strongest pace in over six years late last year, with the Commerce Department Friday revising up its fourth-quarter estimate as businesses slowed inventory reduction and boosted spending, but consumers spent less than first thought.

Gross domestic product rose at a 5.9% annual rate October through September, the fastest rate since the third quarter of 2003, the Commerce Department reported. GDP expanded by 2.2% in the third quarter of 2009.

A month ago, the department first estimated that GDP — a measure of all goods and services produced in the economy — rose by an annual 5.7% in the fourth quarter.

The new figure was in line with expectations of economists surveyed by Dow Jones Newswires.

For all of 2009, GDP declined an unrevised 2.4%, which was the largest full-year contraction since the 10.9% drop in 1946. The economy expanded 0.4% in 2008 and 2.1% in 2007.

Although the data confirmed that the economic rebound was picking up following a yearlong contraction that ended in the second quarter, the gains aren’t expected to be sustained unless consumer spending can take up the slack from waning stimulus money.

The Inventory Story

See a graphic explaining the effect of inventories on GDP.

View Interactive

The latest report showed that inventory liquidation slowed more than expected, contributing 3.88 percentage points to GDP — the most since the fourth quarter of 1987. That compares with the previous estimate of 3.39 percentage points. U.S. companies pared inventories October through December by $16.9 billion, revised from $33.5 billion.

The rebuilding of inventories is providing a temporary boost to the economy, after businesses slashed $139.2 billion in inventories in the third quarter and $160.2 billion in the second.

Real final sales of domestic product, which is GDP less the change in private inventories, increased at an annual rate of 1.9% in the fourth quarter. That was down from the previous estimate of 2.2%, but higher than the 1.5% rise in the third quarter.

Improved spending by businesses also contributed to the upward adjustment in GDP, adding 0.62 percentage point to GDP. Business spending rose 6.9%, up from an earlier estimate of 2.9% and the strongest pace since the first quarter of 2006. That was a turnaround from the 5.9% decline in the third quarter.

The biggest component of GDP — consumer spending — rose 1.7%, compared to the previously estimated 2.0% gain. It had registered a 2.8% increase in the third quarter, helped by the government’s “cash-for-clunkers” auto-purchase program.

Consumer spending contributed 1.23 percentage points to GDP in the fourth quarter, a revision from 1.44 percentage points initially estimated.

Federal Reserve Chairman Ben Bernanke told Congress this week that the Fed funds rate will likely remain at a record low near zero for an extended period due to the slow recovery. He forecast a growth rate of between 3.0% and 3.5% this year, while saying inflation should remain subdued.

Friday’s report showed continued moderate inflation pressures in the fourth quarter. The government’s price index for personal consumption increased 2.3%, down from the previously estimated 2.7% rise. The index rose 2.6% in the third quarter.

However, the closely watched core PCE gauge, which excludes volatile food and energy prices, was revised to 1.6% from 1.4% in the fourth quarter. That’s up from 1.2% in the third quarter, but remains within the 1.5% to 2% range that Fed officials consider to indicate price stability.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, rose by 1.9%. That compares with an initial estimate of 2.1% and a 1.3% rise in the third quarter. The chain-weighted GDP price index increased an unrevised 0.4%, which was the same rate as in the third quarter.

Another component of GDP, housing, was revised down to 5.0% from 5.7% in the fourth quarter. Residential fixed investment had posted an 18.9% in the third quarter, as the government tax credit spurred home buying.

Federal government spending in the fourth quarter increased an unrevised 0.1%. State and local government outlays fell 2.0% — the fourth decline in five quarters — which was a more severe than the initial 0.3% estimate and the worst decline since the third quarter of 2001.

International trade contributed 0.3 percentage point to GDP, versus an initial estimate of 0.5 percentage point. U.S. exports rose 22.4%, the biggest jump since the second quarter of 1996, while imports increased 15.3%.

Write to Tom Barkley at tom.barkley@dowjones.com and Judith Burns at judith.burns@dowjones.com

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