The economy grew a touch faster than initially thought in the fourth quarter as businesses drew down inventories at a much slower pace and boosted investment, a government report showed on Friday.

In its second reading of fourth-quarter gross domestic product, the Commerce Department said the economy grew at a 5.9 percent annual rate, rather than the 5.7 percent pace it estimated last month.

It was still the fastest pace since the third quarter of 2003. The economy expanded at a 2.2 percent annual rate in the third quarter.

Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 5.7 percent rate in the October-December period.

U.S. stock index futures moved slightly higher after the data while U.S. Treasury debt prices were little changed. The U.S. dollar slipped against the yen, but gained against the euro.

While the economy rebounded strongly in the second half of 2009 from the worst downturn since the 1930s, data so far suggests the rapid rate of acceleration slowed somewhat in the first quarter of 2010.

You are left with a sinking feeling that the growth rate this year will again be modest because it's hard to expect the usual boom in housing and pickup in consumer durables that typically leads a recovery, said Cary Leahey, an economist at Decision Economics in New York.

A sharp brake in the pace at which businesses liquidated inventories combined with increased spending on equipment and software to boost growth in the fourth quarter, offsetting lackluster consumer spending and residential investment.

When businesses increase inventories or slow the rate at which they are liquidating them, they need to meet more demand out of current production, which lifts GDP.

Stripping out inventories, the economy expanded at an annual rate of 1.9 percent, rather than the 2.2 percent pace estimated last month, indicating growth was only being partially driven by demand.

Business inventories fell only $16.9 billion in fourth quarter instead of $33.5 billion estimated last month. They dropped $139.2 billion in the July-September period. The change in inventories alone added 3.88 percentage points to GDP in the last quarter.

This was the biggest percentage contribution since the fourth quarter of 1987.

For the whole of 2009, the economy contracted 2.4 percent, the biggest decline since 1946, the department said.


In the final three months of 2009, consumer spending increased at a 1.7 percent rate, rather than the 2 percent pace reported in January. That was below the 2.8 percent rate in the prior quarter when consumption got a boost from the government's cash for clunkers auto purchase program.

In the fourth quarter, consumer spending - which normally accounts for about 70 percent of U.S. economic activity -- contributed 1.23 percentage points to GDP.

The department confirmed robust spending on equipment and software caused business investment to grow for the first time since second quarter of 2008, despite a drop in spending on commercial real estate.

Business investment rose at a 6.5 percent rate, much faster than the 2.9 percent pace estimated last month. It had dropped 5.9 percent over the prior three-month period.

Spending on new home construction grew at a slower 5 percent rate in the fourth quarter, instead of 5.7 percent estimated last month. It had grown at an 18.9 percent pace in the third quarter.

Both exports and imports grew much stronger than initially estimated in the fourth quarter, leaving a trade gap that contributed 0.3 percentage point to GDP growth, the data showed.

Separately, business activity in New York City expanded this month to its highest level in more than three years.

The Institute for Supply Management-New York's seasonally adjusted index of current business conditions rose to 77.0 in February, the best level since November 2006, from 72.6 in January. The 50 level separates growth from contraction.

Future optimism decreased, however, with the six-month outlook index down at 81.1 in February from 97.0 in January.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)