GDP hints recession is moderating

While the less steep fall in the stock of unsold goods helped to lessen the severity of the economy's contraction in the first quarter, analysts said this suggested inventories would remain a drag on growth in the second quarter.

Exports fell at a 28.7 percent pace, the largest decline since the fourth quarter of 1971, after dropping at a 23.6 percent rate in the fourth quarter.

The drop in exports lopped off a record 3.86 percentage points from GDP, and reflected the slump in global demand. Sluggish domestic demand saw imports plunging 34.1 percent, adding a record 6.05 percentage points to first-quarter GDP.

Business investment spending tumbled a record 36.9 percent and homebuilding activity fell 38.7 percent, the biggest decline since the second quarter of 1980.

Consumer spending, which accounts for over two-thirds of U.S. economic activity, rose 1.5 percent -- slower than the 2.2 percent rate estimated last month -- but still a turnaround after a sharp plunge in the second half of last year.

This was also viewed as another factor that could weigh on the economy in the second quarter.

"The lower consumption figure is a reminder of the fundamental problems that households are facing, and the slower inventory run-down means that there is more to come in the current quarter," said Harm Bandholz and economist at Unicredit Markets & Investment Banking in New York.

But spending could pick up in the third quarter as households grow more optimistic about the economy and the government's $787 billion package of spending and tax cuts filters through.

The Reuters/University of Michigan Surveys of Consumers' sentiment gauge rose to 68.7 in May from 65.1 in April. That was the highest reading since September.

Separately, the National Association of Purchasing Management-New York's local business conditions index rose to 361.6 in May from 356.0 the previous month.

(Additional reporting by Richard Leong and Ellen Freilich in New York and Ros Krasny in Chicago; Editing by James Dalgleish)