The economy grew a touch more than initially thought in the fourth quarter, but a surprise drop in January home sales to a seven-month low and weaker consumer sentiment underscored the headwinds for the recovery.

U.S. gross domestic product expanded at a 5.9 percent annual rate instead of the 5.7 percent pace estimated last month, the Commerce Department said on Friday.

Separate reports showed sales of previously owned homes dropped sharply in January, while growing impatience about efforts to stimulate employment led to a dip in consumer sentiment this month, boding ill for consumer spending.

The GDP bounce has yet to translate to rising consumer and business confidence, and this would seem to be an important transition mechanism for allowing the inventory bounce to translate to sustained growth, said Mike Englund, chief economist at Action Economics in Boulder, Colorado.

Stocks ended a touch higher on low volume as a snowstorm blanketing the Northeast kept some traders home. Treasury debt prices rose as investors focused on the weak housing and confidence data, while the dollar fell.

The economy rebounded strongly in the second half of 2009 from the worst downturn since the 1930s, but data so far, including home sales, suggest the rapid rate of acceleration has started to slow this year.

Economists cautioned that severe winter weather across much of the country will distort data on employment, housing and retail sales and hurt growth this quarter.

Sales of existing homes dropped 7.2 percent to an annual rate of 5.05 million units last month, the lowest since June, the National Association of Realtors said.

Economists attributed much of the decline to payback from a tax credit-related surge in the second half of 2009, although they said bad weather also likely played a role.

A popular tax credit for first-time buyers that had been scheduled to end in November spurred activity late last year at this year's expense. The credit was extended until June, however, and expanded to cover repeat buyers, which economists say should help sales perk up in spring.

Overall the picture for housing is pretty weak. We are dealing with a backlog of homes for sale and a big pipeline of foreclosures waiting to hit the market, said Bill Cheney, chief economist at John Hancock Financial Services in Boston.

I don't think the housing market has to strengthen a whole lot in order for the (economic) recovery to continue. First quarter GDP will be right around 3 percent.

INVENTORIES BOOST GROWTH

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.

The 5.9 percent fourth quarter growth pace was the fastest since the third quarter of 2003 and marked a quickening from the 2.2 percent rate in the third quarter. Markets had expected GDP -- which measures total goods and services output within U.S. borders -- would be unrevised at a 5.7 percent pace.

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

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

Business inventories, which fell only $16.9 billion in fourth quarter instead of $33.5 billion estimated last month, added 3.9 percentage points to GDP, their biggest contribution since the fourth quarter of 1987.

Consumer spending increased at a modest 1.7 percent rate.

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.

Consumers have been getting more impatient with the slow progress of the stimulus program, and confidence in the Obama administration's economic policies has begun to wane, Richard Curtin, director of the surveys, said in a statement.

Analysts also worry a resumption in house price declines as foreclosed homes come into a weak market could also apply more brakes to consumer spending.

The resulting decline in household wealth is another reason to suspect that consumption growth will remain weak for some time yet, said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto.

While consumers continue to hold back, businesses are stepping up spending on equipment and software.

Business investment rose at a 6.5 percent rate in the fourth quarter, much faster than the 2.9 percent pace estimated last month.

(Additional reporting by Corbett Daly in Washington and Richard Leong and Caroline Valetkevitch in New York; Editing by Kenneth Barry)

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