1st-quarter growth lowered, jobless claims fall

Customers shop at a Lowes store in Scottsdale, Arizona, February 22, 2010.

WASHINGTON (Reuters) - The U.S. economy grew at a slightly slower pace than previously estimated in the first quarter but the recovery still appeared solid, suggesting the economy could withstand fallout from the European debt crisis.

Gross domestic product expanded at a 3 percent annual rate, the Commerce Department said on Thursday, below its initial estimate of 3.2 percent. That surprised analysts who had expected growth to be revised up to 3.4 percent after monthly data pointed to stronger consumption and capital spending.

Although economic activity slowed from the fourth quarter's robust pace of 5.6 percent, analysts believe the recovery is strong enough to absorb a moderate blow from the European sovereign debt crisis sparked by Greece's deteriorating finances.

"It's certainly a downside risk, but we don't think it's a large risk as long as there is no financial contagion. We don't see the recovery faltering as a result of these concerns in Europe," said Dana Saporta, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey.

There are worries that austerity measures being adopted by some European countries to cut huge budget deficits could slow growth in the region and hurt the global economy.

The president of the St. Louis Federal Reserve Bank, James Bullard, also played down the risk to the U.S. economy stemming from Europe.

"Right now, I think the U.S. is going to be a beneficiary of the crisis in Europe, barring any contagion, and I'm arguing that I don't see how the contagion could occur," Bullard told reporters in Stockholm.

In a separate report on Thursday, the Labor Department said new applications for state jobless benefits fell 14,000 to 460,000 last week, above market forecasts for a decline to 455,000.

SPENDING REVISED LOWER

The data had little impact on U.S. financial markets, which were driven by China's assertion that Europe remained a key investment market for its vast foreign exchange reserves, dismissing a report it was reviewing its holdings of euro zone government bonds.

On Wall Street, U.S. stocks rallied, with the broader Standard & Poor's 500 index .SPX closing up more than 3 percent. U.S. government bond prices sagged with the rise in equities, and the dollar stepped back from near four-year highs against the euro.

Output in the first three months of the year was pared back as business spending rose at only a 3.1 percent rate instead of the 4.1 percent initially reported last month. Spending grew at a 5.3 percent pace in the fourth quarter.

Business spending on software and equipment increased at a 12.7 percent rate rather than 13.4 percent. The GDP report also showed growth in after-tax corporate profits slowed to 2.1 percent in the first quarter after rising 6.5 percent in the prior quarter.

Consumer spending, which is key to the economy's recovery, was slightly revised down to a 3.5 percent rate from the 3.6 percent pace reported last month. This reflected modest growth in service-sector consumption, which offset a sturdy rise in purchases of durable goods.

Spending was still more than double the 1.6 percent pace in the fourth quarter and was the largest advance since the first quarter of 2007.

"While the downward revisions to consumer spending and equipment and software investment now paint a picture of a slightly weaker rebound in the most cyclical components of GDP at the start of the year, more timely indicators suggest that momentum is building into the second quarter," said Peter Newland, an economist at Barclay Capital in New York.

Consumer spending, which normally accounts for roughly 70 percent of U.S. economic activity, added 2.42 percentage points to GDP last quarter, the largest contribution since the first quarter of 2007.

In a sign that consumers were starting to loosen purse strings, warehouse club operator Costco Wholesale Corp reported higher-than-expected quarterly profits on Thursday and said customers were willing to buy more than just the essentials.

Recovery from the longest and deepest recession since the Great Depression had so far been largely driven by manufacturing as businesses replenished their warehouses. Consumers, however, are now participating as the labor market begins to firm.

Analysts expect consumer spending to hold near current levels in the second quarter, citing a strengthening jobs market, the recent bounce in housing and lower energy prices.

"These factors should more than offset the impact of the retrenchment in stock markets," said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto.

In the first quarter, businesses stepped up the accumulation of goods. Business inventories rose $33.9 billion, revised from the $31.1 billion reported last month. It was the first increase since the first quarter of 2008. Inventories contributed 1.65 percentage points to GDP in the quarter.

The rebuilding of inventories from record low levels is boosting manufacturing, with activity in the nation's Midwest region rising at a healthy clip in April, a report from the Chicago Federal Reserve showed.

First-quarter growth was also held back by hard-hit state and local governments curbing spending at the steepest rate since 1981. A downturn in construction and spending on structures were also a drag on growth in the first quarter.

New home construction fell after expanding for two straight quarters. While the slowdown in export growth was not as sharp as initially estimated last month, it was overshadowed by a rise in imports. That left a trade deficit, which subtracted 0.66 percentage points from first-quarter economic growth.

(Additional reporting by Pedro Nicolaci da Costa ; Editing by Leslie Adler)