First-quarter growth weak, future looks brighter

By Glenn Somerville

WASHINGTON (Reuters) - U.S. economic growth in the opening quarter this year was the weakest in more than four years as businesses sold off inventories and Americans imported more foreign goods, the government reported on Thursday.

Nevertheless, some key components of the report showed continuing resilience that may foster a healthier pace of expansion later in the year, while a Midwest manufacturing index pointed to a revival in factory activity in May.

The Commerce Department revised down its estimate for first-quarter expansion in gross domestic product, or GDP, to a 0.6 percent annual rate from the 1.3 percent that it estimated a month ago.

It was the slowest quarterly growth since the fourth quarter of 2002 when the economy edged ahead at a 0.2 percent rate and was below Wall Street economists' forecasts for a 0.8 percent quarterly growth rate.

GDP measures the value of all goods and services produced within U.S. borders.

But personal consumption spending, which fuels two-thirds of national economic activity, rose at an upwardly revised rate of 4.4 percent instead of 3.8 percent estimated a month ago, the strongest pace since the first quarter of 2006, when it increased at a 4.8 percent rate.

"The economy is bouncing back in a convincing way," said Mark Vitner, economist at Wachovia Securities in Charlotte, North Carolina.

MOSTLY GOOD NEWS

U.S. government bond prices fell after the data diminished expectations for an official interest rate cut by year-end. Bellwether 10-year U.S. Treasury bonds were down 7/32 of a point to yield 4.90 percent while 30-year bonds fell 8/32 and were yielding 5.02 percent.

In the stock market, the Standard & Poor's index .SPX edged up 0.39 points to a record close of 1,530.62. The Dow Jones industrial average .DJI closed 5.44 points lower at 13,627.64 and the high tech-laden Nasdaq Composite Index .IXIC was ahead 11.88 points at 2,604.47.

The National Association of Purchasing Management-Chicago business barometer rose to 61.7 from 52.9 in April, leading analysts to predict the factory sector now is poised to grow.

"This confirms that the inventory adjustment is behind us and that the manufacturing sector will contribute to a re-acceleration of growth in the economy," said Dana Johnson, chief economist at Comerica in Ann Arbor, Michigan.

The GDP report showed businesses cut inventories at a $4.5-billion annual rate during the first quarter -- a sharp reversal from its estimate a month ago that inventories had increased at a $14.8-billion rate. The reduction in inventories pulled growth down for the quarter but also left room for companies to expand output if consumer spending remains strong.

"It really slowed down for the quarter," said economist Kurt Karl of Swiss Re in New York. "It is probably going to mean good news for the current quarter, though, because once you draw down the inventories it is harder to draw them down further, and the change in inventories is at least one part of this weakness."

In another report, the Labor Department said new claims for jobless pay fell 4,000 last week to 310,000, a sign the job market remains healthy enough to support consumer spending.