May 27 (Bloomberg) -- The U.S. economy grew at a 4.4 percent annual pace from January through March, faster than initially estimated, as businesses replenished inventories, government spending rose and home construction accelerated.

The reading on gross domestic product, the value of all goods and services produced, compares with a previously reported 4.2 percent rate and a 4.1 percent fourth-quarter pace, the Commerce Department said in Washington. Initial jobless claims fell by 3,000 to 344,000 last week, the Labor Department said.

Corporate profits jumped 31.6 percent in the year ended in March, the biggest increase since the first quarter of 1984, the Commerce Department's report showed.

``The profits numbers have been phenomenal,'' said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis. Reaser correctly forecast first-quarter growth. ``Profit growth bodes well for continued gains in capital spending and hiring.''

Stocks rose after retailers including Michaels Stores Inc. and Dollar Tree Stores Inc. reported earnings that surpassed analysts' estimates. The benchmark 10-year U.S. Treasury yield fell to the lowest in three weeks after jobless claims fell less than forecast and one measure of inflation within the GDP report was revised lower. The data suggest Federal Reserve policy makers won't be quick to deviate from their policy of ``measured'' increases in interest rates as the economy strengthens.

Inflation Gauge

The personal consumption expenditures price index excluding food and energy rose at a 1.7 percent annual rate, slower than the 2 percent estimated last month. The gauge of inflation is watched by Federal Reserve Chairman Alan Greenspan and other policy makers and is tied to spending.

Economists had forecast initial jobless claims to decline to 335,000 last week, according to the median forecast in a Bloomberg News survey. The four-week average, a less volatile measure, rose to 335,500 from 334,000, which was the lowest since November 2000.

``The claims data are showing good but not spectacular job growth,'' said Ethan Harris, chief U.S. economist at Lehman Brothers in New York. If Fed policy makers ``were only looking at jobs data the Fed would probably want to move slowly'' in raising rates. Central bankers next meet June 29-30.

President George W. Bush is counting on an acceleration of growth to spur hiring in the months leading up to the U.S. elections in November. Polls this week showed a majority of voters disapprove of the way Bush is handling the economy as the president's job-approval ratings fell to the lowest during his presidency. Since September, the economy has added 1.1 million jobs, after having lost 2.7 million since Bush took office in January 2001.

Employment

Economists said the level of jobless claims may not have to fall as much as in the past in order to correlate with increased hiring. Claims represent 2.6 percent of payrolls, down from an average of 3.1 percent in the 1990s.

``Our feeling is that unadjusted claims have reached frictional levels, below which it will be difficult to fall given the sheer size of the labor market and `normal' rates of job attrition,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez, an economic consulting firm in New York.

Next week, the Labor Department is forecast to report a 230,000 increase in employment for May after April's 288,000 rise, according to the median estimate in a Bloomberg survey.

Economists had forecast GDP grew at a 4.5 percent pace last quarter, based on the median of 72 estimates in a Bloomberg News survey. The economy expanded 5 percent during the 12 months ended in March, the most since 1984.

Stocks

The Dow Jones Industrial Average rose 73 points, or 0.7 percent, while the Standard & Poor's 500 Index increased 4 points, or 0.4 percent, at 3:15 p.m. New York time.

The Treasury's 4 3/4 percent note maturing in May 2014 rose 1/2, pushing down the yield 6 basis points to 4.59 percent. The euro rose 1.3 percent to $1.2265. It fell 1 percent to 110.92 yen.

Profits, adjusted for capital depreciation and changes in the value of inventories, rose to $1.22 trillion last quarter, 1.2 percent higher than the last three months of 2003.

Intel Corp. and Texas Instruments Inc., the two biggest U.S. semiconductor makers, increased inventories in the first quarter to the highest levels since 2001 as sales rose. Profit at Dallas- based Texas Instruments more than tripled as sales jumped 34 percent compared with the same period last year. The sales increase was the biggest in at least a decade.

Texas Instruments

``We expect it to be a good year,'' said Richard Templeton, chief executive at Texas Instruments, in an interview. ``We did have some inventory build that we did on purpose anticipating a stronger second quarter. We think that's important to make sure that we can meet customers' demand.''

The company said in April it would spend $1.3 billion on new equipment and other forms of capital expenditures this year, compared with a previous forecast of $1.1 billion.

Wages and salaries increased $57.8 billion in the fourth quarter, $18.3 billion more than previously estimated, based on revisions that incorporate wage statistics from state unemployment insurance data. Disposable income, adjusted for inflation, rose 4.9 percent in the first three months of the year, more than the 4.3 percent previously estimated.

Adjusted for inflation, GDP totaled $10.7 trillion at an annual rate. Unadjusted for the change in prices, it totaled $11.5 trillion and rose at a 7.2 percent annual rate. The price deflator used to adjust the figures rose at a 2.6 percent annual rate during the quarter, faster than the 2.5 percent pace previously estimated.

Inventories

Companies boosted inventories at a $28.2 billion annual rate, compared with a $15.3 billion increase estimated last month. The rise added 0.75 percentage point to GDP.

Residential housing construction was revised higher to show a 3.8 percent annual rate last quarter compared with a 2.1 percent increase previously estimated.

Business fixed investment, which includes spending on commercial construction as well as equipment and software, rose at a 5.8 percent annual rate in the first quarter, compared with a 7.2 percent gain initially estimated. The rise was led by a 9.8 percent increase in spending on new equipment.

Consumer spending, which accounts for 70 percent of the economy, grew at a 3.9 percent annual pace from January through March compared with a 3.8 percent rise initially estimated. Spending has averaged annualized gains of 3.5 percent a quarter in the last two decades.

Trade Gap

GDP would have been greater if not for a deterioration in the nation's trade balance. The country imported $525.2 more goods and services at an annual rate than it exported last quarter. The government estimated last month the deficit would be $514.6 billion. The trade gap subtracted 0.35 percentage point from growth.

Government spending rose at a 2.9 percent annual rate last quarter rather than the initial estimate of 2 percent.

Gross domestic product may expand 4.6 percent for all of 2004, compared with 3.1 percent in 2003, based on the median forecast in a separate Bloomberg News survey earlier this month. This year's projected growth would be the fastest since 7.2 percent in 1984.

To contact the report on this story: Carlos Torres in Washington ctorres2@bloomberg.net

Last Updated: May 27, 2004 15:17 EDT