Growth surprises but consumers stressed

By Glenn Somerville

WASHINGTON (Reuters) - A buildup in inventories kept the U.S. economy afloat in the first quarter despite the weakest consumer spending since 2001 and reduced business investment, a government report on Wednesday showed.

Gross domestic product grew at a 0.6 percent annual rate in the first quarter, the Commerce Department said. That matched the fourth quarter's advance and topped forecasts for 0.2 percent growth, but did not end a debate on whether the country was sliding into recession.

The Federal Reserve weighed in later with another small cut in official interest rates to counter what policy-makers characterized as weak economic activity.

Some economists said the GDP report suggested the economy was on a bit firmer ground than had been thought, but others braced for worse times ahead as businesses ratchet back production further to try to sell off inventories.

"There are some very troubling signs in this report," said economist Paul Ashworth of Capital Economics Ltd in London. "The GDP figure is being flattered by the strength of demand abroad and an involuntary inventory accumulation."

Stock prices were higher in mid-afternoon in volatile trading. Stocks had a positive tone from early trading, buoyed by hopes that employment will hold up. ADP Employer Services said it found private-sector companies added 10,000 jobs in April, a sharp contrast to forecasts that they would cut jobs.

The government is set to issue its report on April employment this Friday and forecasts are that 80,000 more jobs will be cut. Jobs were lost in each of the first three months this year.

HOUSING STILL WEIGHS