The economy grew a touch more than initially thought in the fourth quarter, but a surprise big drop in sales of previously owned homes last month showed trouble spots still remain.

In its second reading of fourth-quarter gross domestic product, the Commerce Department said on Friday the economy grew at a 5.9 percent annual rate, rather than the 5.7 percent pace it estimated last month. Market had expected growth would be unrevised.

Separate reports showed existing home sales fell sharply in January and consumer confidence slipped this month, boding ill for consumer spending.

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.

U.S. stocks fell on the weak home sales, while Treasury debt prices rose. The U.S. dollar fell against the yen and 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.

Sales of existing homes dropped 7.2 percent to an annual rate of 5.05 million units last month, the National Association of Realtors said, sharply below market expectations for a 5.5 million unit pace.


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.

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

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 3.9 percentage points to GDP in the last quarter.

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

The stronger inventory reported ... means it is less likely we can expect another substantial contribution to growth in this quarter from inventories, said Michael Feroli, an economist at JPMorgan in New York.

In the final three months of 2009, consumer spending increased at a 1.7 percent rate, 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.

With consumer confidence remaining subdued, spending is not expected to pick up much. The Thomson Reuters/University of Michigan's Surveys of Consumers' index of consumer sentiment dipped to 73.6 in February from 74.4 in January.

The Commerce 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.

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

(Additional reporting by Corbett Daly and Richard Leong; Editing by Neil Stempleman)