Economy in U.S. Grew at 2.4% Rate, Less Than First Estimated

May 22 (Bloomberg) –- Federal Reserve Chairman Ben S. Bernanke offers his views on the central bank's monetary policy, exit strategy and the U.S. economy. Bernanke testifies before the Joint Economic Committee in Washington. Representative Kevin Brady, a Texas Republican and chairman of the committee, also speaks. (Excerpts. Source: Bloomberg)

The U.S. economy expanded less than previously estimated in the first quarter as slower inventory building and cutbacks in government spending overshadowed the biggest gain in consumer purchases since the end of 2010.

Gross domestic product rose at a 2.4 percent annualized rate, the Commerce Department said today in Washington. The median forecast in a Bloomberg survey called for no revision from the 2.5 percent pace initially reported.

The boost to household wealth from rising home values and stock prices is allowing Americans to weather higher payroll taxes and sustain purchases, the biggest part of the economy. Resilient consumer spending, further housing market progress and job gains will help the expansion strengthen in the second half of the year as the fallout from federal budget cuts dissipates.

“The economic outlook is still favorable,” said Millan Mulraine, an economist at TD Securities USA LLC in New York, who correctly forecast GDP. “It’s still fairly robust growth driven by consumer spending. We expect an acceleration in the second half as the economy moves beyond the current soft patch.”

Another report today showed more Americans filed claims for unemployment insurance payments last week as holiday closures kept five states from completing a full count. Applications for jobless benefits increased by 10,000 to 354,000 in the week ended May 25, the Labor Department said.

Photographer: Victor J. Blue/Bloomberg

People ride the escalator at The Shops at Columbus Circle mall in New York, on May 27, 2013. Close

People ride the escalator at The Shops at Columbus Circle mall in New York, on May 27, 2013.

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Photographer: Victor J. Blue/Bloomberg

People ride the escalator at The Shops at Columbus Circle mall in New York, on May 27, 2013.

Stock-index futures held earlier gains after the reports. The contract on the Standard & Poor’s 500 Index maturing in June rose 0.2 percent to 1,650.7 at 8:55 a.m. in New York.

Economists’ Estimates

Forecasts of the 81 economists surveyed for GDP, the value of all goods and services produced, ranged from gains of 2 percent to 3 percent.

Consumer spending, which accounts for about 70 percent of the economy, increased at a revised 3.4 percent annualized rate in the first quarter. The gain, which added 2.4 percentage points to GDP, was more than the previous estimate of 3.2 percent. The median forecast in the Bloomberg survey called for a 3.3 percent increase.

The GDP estimate is the second of three for the quarter, with the final release scheduled for late June when more information becomes available.

A bigger decline in commercial construction than the government’s initial estimate also weighed on first-quarter growth, according to today’s report. Business investment on equipment and software grew faster and the trade deficit subtracted less than previously estimated.

Photographer: Victor J. Blue/Bloomberg

Consumer spending, which accounts for about 70 percent of the economy, increased at a revised 3.4 percent annualized rate in the first quarter. Close

Consumer spending, which accounts for about 70 percent of the economy, increased at a... Read More

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Photographer: Victor J. Blue/Bloomberg

Consumer spending, which accounts for about 70 percent of the economy, increased at a revised 3.4 percent annualized rate in the first quarter.

Payroll Tax

Still, the stronger-than-projected gain in household purchases means the economy is better equipped to withstand $85 billion in fiscal tightening and the lagged effect from a two percentage-point increase in the payroll tax that went into effect at the start of 2013.

Growth may cool this quarter to a 1.6 percent annualized rate, according to the median forecast of economists in a separate Bloomberg survey conducted earlier this month. GDP is projected to climb at an average pace of 2.4 percent in the second half of the year.

Domestic final sales -- which strip out inventories, exports and imports -- increased 1.8 percent, more than the prior estimate of 1.5 percent, today’s report showed.

“The economy is on a better footing as there’s more final demand,” Brian Jones, a senior U.S. economist for Societe Generale in New York, said before the report. “We have a variety of drivers for growth. The economy may cool this quarter, but not by all that much.”

Government Spending

Government outlays, down for the 10th time in the past 11 quarters, fell more than previously estimated amid the winding down of military operations in Iraq and Afghanistan. Government spending will be limited by cuts in planned federal spending, or sequestration.

Defense spending dropped at an 12.1 percent annualized rate, compared with a previously reported 11.5 percent annualized pace, today’s report showed. Combined with a 22.1 percent plunge in the last three months of 2012, it was the biggest back-to-back decline on average since 1954, when the military demobilized after the Korean War.

Americans increased their personal spending by drawing down savings, today’s report showed. The saving rate dropped to 2.3 percent in the first quarter, compared with an initial estimate of 2.6 percent. It followed a 5.3 percent rate in the fourth quarter.

Real Income

Disposable income adjusted for inflation dropped at an 8.4 percent annualized rate from January through March, compared with a 5.3 percent decrease that was previously estimated and the biggest decline since the third quarter of 2008. In the fourth quarter, real disposable income surged 8.9 percent.

Today’s report also offered a first look at corporate profits. Earnings fell 1.9 percent in the first quarter from the previous three months, while climbing 6.1 percent from the same period last year.

Corporate spending on equipment and software climbed at a 4.6 percent annualized pace, more than the 3 percent gain previously estimated by the Commerce Department.

Inventory accumulation was slower than initially estimated, today’s data showed. While that provided less of a boost to the economy in the first three months of 2013, it sets the stage for growth this quarter as higher sales prompt more stockpiling.

Inventories Contribution

Inventories added 0.63 percentage point to GDP in the first quarter, less than the previous estimate of 1.03 percentage points.

The trade gap and inventories are two of the most volatile components in GDP calculations.

Residential construction increased at a 12.1 percent annualized rate, less than the 12.6 percent pace initially projected.

The rebound in housing will continue to underpin growth as borrowing costs near a record low attract buyers and drive building, while rising house values lift wealth.

Williams-Sonoma Inc. (WSM), the San Francisco-based owner of the namesake, Pottery Barn and West Elm home-goods chains, reported an 8.6 percent increase in net revenue in the three months ended May 5.

People Spending

Shoppers “are spending money to redecorate,” Laura Alber, president and chief executive officer, said on a May 23 earnings call. “Whether they’re moving or not, it’s time to get some new stuff in your home after a period when I think people didn’t feel comfortable spending money on their homes.”

Consumer confidence climbed in May to the highest level in more than five years, and the S&P/Case-Shiller index of home values in 20 cities advanced in the year to March by the most in seven months, data showed this week.

At the same time, bigger gains in employment and wages are needed to accelerate spending. The economy remains hampered by high unemployment and government spending cuts, and tightening policy too soon would endanger the recovery, Federal Reserve Chairman Ben S. Bernanke said last week.

“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said in congressional testimony in Washington.

Price pressures remain contained, today’s report also showed. A measure of inflation tied to consumer spending, the one tracked by Fed policy makers, climbed at a 1 percent annualized pace compared with a prior estimate of 0.9 percent. Central bankers have said their goal is to keep inflation at about 2 percent.

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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