U.S. Economy Expanded at 1.9% Pace in First Quarter, Above Prior Estimate

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Photographer: Tim Boyle/Bloomberg

Shoppers look at refrigerators at the ABT store during a promotion offering a 15 percent rebate on certain Energy Star appliances in Glenview, Illinois, U.S.

The U.S. economy grew at a 1.9 percent pace in the first quarter, marking the start of what Federal Reserve policy makers project is a temporary slowdown in growth.

The revised rise in gross domestic product matches the median forecast of economists surveyed by Bloomberg News and follows a 3.1 percent gain in the prior quarter, Commerce Department figures showed today in Washington. The government last month estimated first-quarter growth at 1.8 percent. The figures also showed inflation climbed more than previously calculated.

The jump in commodity prices and the shortage of auto parts stemming from the disaster in Japan earlier this year that have also restrained growth this quarter are showing signs of improving. Fed officials, who lowered their forecasts for growth and employment this year and next, this week maintained record stimulus to underpin the recovery.

“We’re going to see improvement in the second half of the year, but I would not expect it to be stellar,” Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, said before the report. “We still have a bunch of headwinds for growth.”

GDP projections of 71 economists in the survey ranged from 1.7 percent to 2.3 percent. The government’s GDP estimate is the third and final for the quarter.

Revision Breakdown

The first-quarter revision reflected a smaller trade deficit and a bigger increase in inventories than previously reported. A 4.2 percent drop in spending by state and local government agencies that was larger than last estimated and the biggest drop since 1981 held back the advance in GDP.

Orders for durable goods climbed more than forecast in May after slumping the prior month, easing concern manufacturing will share in an extended U.S. growth slowdown, other figures from the Commerce Department showed today.

Bookings for equipment meant to last at least three years rose 1.9 percent after a 2.7 percent decline the prior month that was less than originally reported. Demand for non-military capital equipment also beat expectations after revised April readings showed a smaller decline than previously reported.

Today’s GDP report showed consumer spending rose at a 2.2 percent annual pace, the same as previously reported. The 4 percent gain in the fourth quarter was the biggest since the end of 2006.

Rising Profits

Some U.S. companies are projecting increased profits. Bed Bath & Beyond Inc. (BBBY), the operator of more than 1,100 stores in North America, said this week that profit in its current fiscal year will gain more than the retailer previously expected as sales climb.

The auto industry is among those that will probably rebound next quarter, according to economists. A boost to motor vehicle output, spurred by dwindling inventories following the earthquake and tsunami in Japan in March, will add about 1.5 percentage points to GDP for July through September, Morgan Stanley economists, led by David Greenlaw, wrote in a note to clients.

That follows an estimated 0.8 percentage point subtraction for the second quarter, the economists said. Morgan Stanley this week forecasted growth at a 2.7 percent pace for April through June and 3.9 percent for the third quarter.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.6 percent annual pace, up from the 1.4 percent rate previously estimated. The gauge will rise 1.5 percent to 1.8 percent this year, slightly higher than the 1.3 percent to 1.6 percent estimated in April, Fed officials said this week.

U.S. central bankers said the economy will expand 2.7 percent to 2.9 percent this year, down from forecasts ranging from 3.1 percent to 3.3 percent in April. The revised outlook this week was the second time this year that Fed officials lowered their forecasts for growth.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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