updated 3/29/2007 1:30:44 PM ET 2007-03-29T17:30:44

The economy grew at a 2.5 percent pace in the final quarter of last year, healthier than first thought but still largely caught up in a spell of sluggishness.

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The new reading on gross domestic product, released by the Commerce Department on Thursday, was an improvement from the prior estimate of a 2.2 percent growth rate for the October-to-December period. However, it marked the third quarter in a row where the economy’s growth clocked in at a lethargic 2 percent or better, reflecting the drag of the crumbling housing market on overall business growth.

Many economists expect the GDP will remain mediocre, hovering at around the 2 percent pace in the current January-to-March quarter. Gross domestic product measures the value of all goods and services produced within the United States.

Economists were expecting the fourth-quarter GDP figure to be unchanged from the previous 2.2 percent pace.

The small upgrade to fourth-quarter GDP mostly stemmed from businesses investing more to build up their inventories of unsold goods, especially automobiles, than the government previously estimated a month ago.

In other economic news, the Labor Department reported that new claims filed for unemployment insurance dropped by 10,000 to 308,000 last week. That suggests the jobs market is still in good shape even as the economy suffers in other areas.

The 2.5 percent growth rate at the end of the fourth quarter capped a year that started off strong and then hit a hard patch as the strain of the housing slump took its toll, mostly on spending and investment by businesses. Resilient consumers spent modestly, helping the economy to move ahead.

In the fourth quarter alone, investment in home building was slashed by 19.8 percent, on an annualized basis, the most in 15 years.

The new GDP figures come amid growing anxiety about spiking delinquencies and foreclosures for homeowners with blemished credit histories, the severity of the housing slump and weakness in business investment. Those things have raised questions about the country’s economic health and contributed to turbulence in the stock market.

Federal Reserve Chairman Ben Bernanke, in a congressional appearance on Wednesday, said he doesn’t expect the economy to fall into a recession this year. His predecessor, Alan Greenspan, puts the odds of a recession at one in three.

Bernanke stuck to the Fed’s forecast for the economy to log moderate economic growth and for inflation to ease in the coming quarters. But he acknowledged uncertainties in the economy have grown in recent weeks and that there are risks to the Fed’s forecast.

Fed policymakers held a key interest rate steady last week at 5.25 percent, where it has been since June, and are keeping their options open about any possible future rate moves. Many economists believe rates will stay where they are now for most of this year.

Among the things the Fed is watching closely is business investment, a key ingredient to the economy’s good health. Businesses cut back sharply on capital spending in the final quarter of last year — from home building to investment in equipment and software, key reasons for the overall sluggish showing in GDP.

Companies’ profits lost ground. One measure showed that after-tax profits edged up by just 0.8 in the fourth quarter, compared with a 4.2 percent increase in the third quarter.

Consumers, a major force shaping economic activity, however, boosted their spending in the fourth quarter at a 4.2 percent pace, up from a 2.8 percent growth rate in the third quarter.

Inflation showed signs of improvement. An inflation gauge tied to the GDP report showed that core prices — excluding food and energy — rose at a rate of 1.8 percent. That was slightly better than previously estimated and down from a 2.2 percent increase in the third quarter.

Even so, the Fed says inflation is still too high for its tastes and wants to see it move lower in the months ahead.

The latest snapshot of economic activity comes amid continuing questions in some quarters about President Bush’s stewardship of the economy. Bush’s approval rating on the economy is just 41 percent, while 57 percent disapprove, according to an AP-Ipsos poll. Consumer confidence is sagging. Democrats in Congress, seeking to tap into the consumers’ angst — are advocating policies aimed at helping the middle class and unions.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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