U.S. GDP slowed sharply in the fourth quarter, but still showed signs that a recovery was in motion.

GDP rose at a 4% annual rate, about half the unrevised 8.2% rate reported for the third quarter, the Commerce Department said Friday.

Economists, while forecasting the slowdown, had had expected a more robust 4.8% pace for Q4 GDP.

For the full year, U.S. GDP rose 3.1%, well above the 2.2% growth recorded in 2002.

“Today’s report, though softer than expected, still suggests the economy has plenty of momentum. We look for growth topping 4% in 2004. On this basis, we expect the Fed to begin tightening policy in August,” says Bank of Montreal.

“Healthy gains in most components of the report suggest that the U.S. recovery remained on a strong footing at the end of 2003. And, with accommodative monetary and fiscal conditions set to provide another boost to growth in the first half of this year, the U.S. is likely to turn in an even better performance in 2004,” offers TD Bank. “At the same time, more evidence in today’s report of muted price pressures indicates that the Federal Reserve can afford to be ‘patient’ in removing the monetary stimulus still feeding its way through the U.S. economy.” It sees rates starting higher in August, too.

“The solid growth is nothing to sneeze at. Government expenditures were not up as much as we anticipated and the inventory swing was much smaller than expected. However, broad growth elsewhere looks healthy,” BMO Nesbitt Burns says. “This report takes the pressure off the bond market. The story making the rounds will be that the economy can grow forever at 4% without reducing the GDP excess capacity gap or creating inflation.”

In other U.S. economic news, the purchasing managers index for the Chicago region surged in January to its highest level since July 1994, rising to 65.9 from a revised 59.2 in December. A reading above 50 is indicative of expansion.

RBC Financial reports that, “the production index saw the largest jump, rising from 63.4 to 76.5. New orders rose 4.2 points to 69.7, and prices paid climbed 9.2 points to 67.8, confirming the emergence of inflationary pressures. On the weaker end, the employment index dipped from 49.6 to 48.3, the third consecutive below-50 read. However, with the inventory index falling an additional 3.2 points to 37.4, the need to rebuild inventories will not only add to growth in the current quarter, but also add to jobs.”

Also this morning, the University of Michigan consumer sentiment survey beat expectations by rising 0.6 points to 103.8. “This now puts the January survey 11.2 points higher than December’s, and marks its highest value since November of 2000,” says RBC. “The present conditions component of the index reached 109.5, 12.5 points above December’s level. Expectations also rose sharply by 10.3 points to 100.1. It’s clear that the strong growth exhibited by the U.S. economy over the second half of 2003 is having a significant impact on confidence. This impact will become even greater when employment numbers start to follow suit.”