The U.S. economy grew more slowly in the first quarter than previously estimated, reflecting smaller gains in inventories and bigger government cutbacks.
Gross domestic product climbed at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, revised Commerce Department figures showed today in Washington. The report also showed corporate profits rose at the slowest pace in more than three years and smaller wage gains at the end of 2011.
Consumer spending at retailers and car dealerships kept the economy moving forward last quarter just as businesses investment cooled, showing why the economy needs to generate bigger job gains to sustain the expansion. The threat of a slump in Europe adds to concerns the U.S. recovery will struggle to gain speed.
“The consumer showed some good results in the first quarter, but going forward, the outlook is one of steady albeit unspectacular gains,” said Richard DeKaser, deputy chief economist at Parthenon Group LLC in Boston, who correctly forecast the revision. “The phrase that best describes our economy is ‘muddling along.’”
Other reports today showed more Americans than projected filed claims for jobless benefits last week and companies added fewer workers than forecast in May.
First-time applications for unemployment insurance payments increased by 10,000 to 383,000 in the week ended May 26 from a revised 373,000 the prior week, the Labor Department reported. They exceeded the median estimate of 370,000 in a Bloomberg News survey of economists.
Figures from Roseland, New Jersey-based ADP Employer Services showed payrolls increased by 133,000 this month following a revised 113,000 gain in April. The median estimate of 39 economists surveyed by Bloomberg called for a May advance of 150,000.
Stock-index future trimmed earlier gains after the reports. The contract on the Standard & Poor’s 500 Index maturing in June rose 0.1 percent to 1,309.5 at 8:52 a.m. in New York. They had been up as much as 0.6 percent earlier.
Growth forecasts from the 79 economists surveyed ranged from 1.6 percent to 2.2 percent. The world’s largest economy expanded at a 3 percent rate in the prior three months.
The U.S. cooled last quarter just as other global economies also lost steam. Growth in the 17-nation euro region stagnated in the first quarter from the same time in 2011. China’s economy expanded 8.1 percent in the first three months of 2012 from a year earlier, the slowest pace in 11 quarters.
Consumer spending climbed at a 2.7 percent annual rate, revised from a 2.9 percent initial estimate and following a 2.1 percent gain in the prior three months. Purchases added 1.9 percentage points to growth.
“I remain cautiously optimistic about improving economic trends as the year goes on and I feel like our North American business is performing OK in a difficult environment,” Ron Sargent, chief executive officer of office-supply retailer Staples Inc. said during a May 16 earnings call. “We continue to see modest improvement in the U.S. economy and ongoing weakness in Europe.”
Revisions to income figures may raise concern that purchases can sustain similar gains. Wages and salaries rose by $28.9 billion in the fourth quarter, less than the $89.1 billion gain previously reported. That dropped the saving rate to 4.2 percent at the end of 2011.
The rate decreased to 3.6 percent in the first quarter, the lowest since the fourth quarter of 2007.
Today’s report also offered a first look at corporate profits. Earnings climbed 0.6 percent from the previous three months, the smallest increase since a drop in the fourth quarter of 2008. They rose 6.5 percent from the same time last year.
Spending by state and local government agencies dropped at a 2.5 percent annual rate in the first quarter, more than twice the 1.2 percent decline initially reported, today’s data showed.
A smaller gain in stockpiles may help the economy pick up this quarter. Inventories contributed 0.2 percentage point to GDP growth compared with an initial estimate of 0.6 percentage points. Stockpiles were rebuilt at a $57.7 billion annual pace after a rate of $52.2 billion in the final three months of 2011.
“Leaner inventories are a plus for future growth prospects,” Paul Edelstein, a U.S. economist at IHS Global Insight in Lexington, Massachusetts, said before the report.
Economists at Morgan Stanley in New York are among those projecting growth will pick up this quarter. The economy will grow at a 2.4 percent annual rate, according to their latest tracking estimate, as gains in housing and consumer spending climbs help offset slowdowns in business investment.
Consumers were probably able to lift demand last quarter as the labor market improved. Employers increased payrolls by 688,000 from January through March, the biggest quarterly gain since the first three months of 2006, data from the Labor Department show.
Job creation has since slowed. Employers took on 115,000 new workers in April, the fewest in six months. Economists project a Labor Department report tomorrow will show payrolls grew by 150,000 last month, still weaker than any month from November through March.
Federal Reserve Bank of New York President William C. Dudley said the U.S. expansion will probably continue at a “moderate” pace and that additional stimulus likely won’t be needed unless the economy falters.
“As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs,” Dudley said yesterday.
Central bank policy makers said last month they anticipated keeping the Fed’s benchmark rate near zero until at least late 2014, reiterating a plan announced in January.
Gross domestic income in the first quarter was also released today for the first time. The measure, which shows the money earned by the people, businesses and government agencies whose purchases go into calculating growth, rose at a 2.7 percent annual rate from January through March.
According to Federal Reserve research, GDI may be a better gauge of the economy.
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