April 28 (Bloomberg) -- The U.S. economy expanded in the first quarter at an annual pace of 4.8 percent, the fastest in more than two years, led by resurgent consumer spending and the biggest jump in business investment since 2000.

The rise in gross domestic product, the value of all goods and services produced in the U.S., followed a 1.7 percent annual rate of increase in the previous three months, the Commerce Department reported today in Washington.

Growth in jobs and wages and unseasonably warm weather spurred shopping while businesses bought equipment and software. Separate reports today showing declining consumer optimism and slower manufacturing growth may point to a cooling expansion, as predicted by Federal Reserve Chairman Ben S. Bernanke yesterday.

``Consumers are still willing to spend, even with the high energy prices, and capital investment is booming,'' said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who correctly forecast the GDP number. ``By the second half of the year, we'll see the cumulative effect of interest- rate increases begin to bite and the economy slow.''

Confidence among consumers waned this month as gasoline prices climbed, according to a survey by the University of Michigan. A separate report from the National Association of Purchasing Management-Chicago showed the manufacturing expansion in the area slowed in April.

Bernanke told the Joint Economic Committee of the U.S. Congress yesterday that growth will likely moderate and the Fed may pause in its cycle of interest-rate increases.

Labor Costs

Labor costs rose 0.6 percent in the first quarter, less than forecast, compared with a gain of 0.8 percent in the previous three months, the Labor Department reported today.

The yield on the benchmark 10-year U.S. Treasury note rose 2 basis points after the reports to 5.09 percent at 11:25 a.m. in New York. The yield is up 8 basis points this week and is poised for a fourth straight monthly increase.

Economists expected a 4.9 percent gain in GDP last quarter, according to the median of 75 estimates in a Bloomberg News survey. The figure will be revised twice.

``Business looks really, really good,'' Burlington Northern Santa Fe Corp Chief Executive Officer Matthew Rose said in an interview April 25, citing shipment volumes last week that were higher than all but four weeks of last year. Fort Worth, Texas- based Burlington Northern is the second-largest U.S. railroad.

European Confidence

Europe's economy is picking up just as growth in the U.S. is showing signs of moderating in coming months. Confidence among European executives and consumers increased to a five-year high in April, a European Union report showed today. Germany's Economy Ministry today raised its growth forecast for the second time in four months.

Consumer spending, which accounts for more than half the U.S. economy, rose 5.5 percent at an annual rate last quarter, the most since the third quarter of 2003, up from 0.9 percent in the previous three months. The first-quarter rate compares with an average of about 3.3 percent over the last two decades.

Cars and light trucks sold at a 17.6 million annual rate in January, the most in six months. Retail sales during the month rose 3 percent on purchases of building materials, furniture and clothing.

Investment

Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at a 14.3 percent annual rate in the first quarter, after rising at a 4.5 percent rate. Spending on new equipment and software rose 16.4 percent, the most since the first quarter of 2000, after a 5 percent rate in the fourth quarter.

Caterpillar Inc., the world's largest maker of earthmoving equipment, said first-quarter revenue rose 13 percent. The Peoria, Illinois-based company raised its forecasts on higher prices and sales of gas-drilling machinery.

Companies added to stockpiles at a $21.9 billion annual rate last quarter after adding to inventories at a $37.9 billion pace in the fourth quarter. That subtracted 0.52 percentage point from GDP.

Residential construction rose at a 2.6 percent annual rate last quarter after a 2.8 percent gain the previous three months.

The government's personal consumption expenditures index, a measure of prices tied to consumer spending, rose 2.0 percent after a 2.9 percent rise in the fourth quarter. The index excluding food and energy, a measure favored by Fed policy makers, rose at a 2.0 percent annual rate after a 2.4 percent rise the previous quarter.

The GDP price index, a measure of prices tied to the report rose at a 3.3 percent annual rate in the first quarter, following a 3.5 percent fourth-quarter gain.

All 43 economists in a Bloomberg survey forecast a quarter- point increase in the Fed's benchmark lending rate, to 5 percent, when policy makers meet on May 10.

Fuel Prices

Federal Reserve Bank of Dallas President Richard Fisher said April 19 that recent increases in oil and gasoline prices will be ``manageable'' as long as the central bank uses interest rates to respond appropriately.

That same day, Fed Bank of San Francisco President Janet Yellen said in an interview with CNBC that inflation is at ``the upper end of my comfort zone,'' The Fed expects the expansion to slow in the second half.

The economy will probably expand at a 3 percent annual rate by the end of the year, according to economists surveyed by Bloomberg News earlier this month.

The trade deficit widened to $678.2 billion from $655.2 billion in the previous quarter. That subtracted 0.84 percentage point from GDP.

The trade gap reached a record $68.6 billion in January.

Government spending rose last quarter at a 3.9 percent annual rate following a 0.8 percent fourth-quarter decrease.

To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net

Last Updated: April 28, 2006 11:26 EDT