U.S. economic growth slowed in the fourth quarter, but not as sharply as initially thought, with businesses less aggressive in their efforts to reduce unwanted inventory, which could hurt output in the first three months of 2016.

Gross domestic product increased at a 1.0 percent annual rate instead of the previously reported 0.7 percent pace, the Commerce Department said on Friday in its second GDP estimate.

Economists polled by Reuters had expected that fourth-quarter GDP growth would be revised down to a 0.4 percent pace. The economy grew at a rate of 2.0 percent in the third quarter and expanded 2.4 percent in 2015.

U.S. stock index futures extended gains after the data, while prices of Treasuries fell. The dollar .DXY added to gains against a basket of currencies.

Businesses accumulated $81.7 billion worth of inventory in the fourth quarter rather than the $68.6 billion reported last month. The largest contributors to the upward revision to inventory investment were retail trade and mining, utilities and construction.

As a result, inventories subtracted only 0.14 percentage point from GDP growth instead of the previously reported 0.45 percentage point.

The bigger inventory build is bad news for first-quarter GDP growth as it means businesses will have little incentive to place new orders, which will continue to hold down production.

"The weaker drag from inventories in the fourth quarter means that any rebound in the first quarter could be slightly more modest than we previously expected," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

"Nevertheless, it still appears that first-quarter GDP growth is on track to rebound to a very healthy 2.5 percent annualized or higher, which should dampen any concerns about an imminent recession."



First-quarter GDP growth estimates are as high as a 2.5 percent rate, but the risks are tilted to the downside amid slowing world economies, a strong dollar and a recent global stock market sell-off that has tightened financial market conditions.

Cheap oil has also been a drag on the profits of oil field companies such as Schlumberger and Halliburton, prompting them to slash capital expenditure budgets.

The upward revision to fourth-quarter GDP growth also reflected a smaller trade deficit than initially thought as imports contracted. The trade deficit subtracted 0.25 percentage point from GDP growth instead of the 0.47 percentage point reported last month.

Business spending on equipment contracted at a less steep 1.8 percent rate last quarter, compared to the previously reported 2.5 percent rate.

There was a small downward revision to consumer spending, which accounts for more than two thirds of U.S. economic activity. Consumer spending rose at a 2.0 percent pace rather than the 2.2 percent rate reported last month.

Unusually mild weather hurt sales of winter apparel in December and undermined demand for heating. But there are signs consumption picked up in January with the return to more normal winter temperatures.

With gasoline prices around $2 per gallon, a tightening labor market gradually lifting wages and house prices boosting household wealth, the fundamentals for consumer spending remain quite strong.

Business spending on nonresidential structures contracted at a 6.6 percent rate rather than the 5.3 percent pace reported last month. Government spending contracted at a 0.1 percent rate instead of rising at a 0.7 percent rate.

By Lucia Mutikani- Reuters (Editing by Paul Simao)