WASHINGTON U.S. economic growth cooled in the first quarter as businesses cut back on investment and restocked shelves at a slower pace, but the biggest rise in consumer spending in more than a year cushioned the blow.
Gross domestic product expanded at a 2.2 percent annual rate, the Commerce Department said on Friday, moderating from the fourth quarter's 3 percent rate.
Economists had expected somewhat firmer growth, but were taken by surprise by another big drop in defense spending. Still, growth was stronger than the 1.5 percent or less pace analysts had anticipated early in the quarter.
While the growth pace remained too slow to offer comfort to President Barack Obama as he seeks a second term, it did not appear weak enough to alter the wait-and-see stance on monetary policy at the Federal Reserve.
"There's nothing catastrophic happening, this is just slow growth and this underscores that the economy is on sound footing but nothing more," said Steven Baffico, chief executive at Four Wood Capital Partners in New York.
Even with the deceleration in growth, the United States is performing better than most advanced nations, with some economies in Europe already back in recession.
Government spending dropped for a sixth straight quarter as defense outlays fell and austerity at state and local governments showed few signs of easing.
A rise in demand for automobiles, which powered the largest pick up in consumer spending since the fourth quarter of 2010, helped offset the drag from government and business spending, which dropped for the first time since the recession ended.
The slump in business spending was likely to be temporary and related to the expiration of tax incentives for businesses, economists said. Corporations are sitting on a $2 trillion dollar cash pile.
In another heartening sign, home construction rose at its fastest pace since the second quarter of 2010, thanks to an unusually warm winter.
Economists said that while growth was not weak enough to spur the Fed into another round of bond buying, it still bolstered the central bank's view that interest rates should be kept near zero at least through late 2014.
Fed Chairman Ben Bernanke on Wednesday expressed comfort with the current policy stance, although he held out the prospect of more bond buying if the economy deteriorated.
"This report plays directly into the hands of those who want to keep rates low for a very long time," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
CONSUMERS TAKE UP SLACK
Stocks on Wall Street rose and recorded their best weekly gains in more than a month as forecast-beating profits from Amazon.com (AMZN.O) and Expedia (EXPE.O) offset the GDP report.
Prices for U.S. Treasury debt weakened, while the dollar fell against a basket of currencies.
Though consumers took up the slack for growth in the first quarter, some details of the report painted a somewhat weak picture for the second quarter.
Consumer spending, which makes up about 70 percent of U.S. economic activity, increased at a 2.9 percent rate in the first quarter after rising 2.1 percent in the final three months of last year.
Automakers had reported that sales rose by the most in four years during the first quarter. Part of that reflected pent-up demand after last year's earthquake and tsunami in Japan left showrooms bereft of popular models.
Motor vehicle production contributed 1.12 percentage points to first-quarter GDP growth, more than double the prior quarter, and spending on so-called durable goods, like autos rose at a 15.3 percent pace.
But a repeat performance in the second quarter is unlikely as auto sales ended the prior period on a soft note.
And with wage growth anemic and the labor market showing early signs of fatigue after employment growth averaged 246,000 per month between December and February, the surge in consumer spending will probably fizzle.
Spending in the last quarter was funded from savings, with Americans stashing away cash at a slower 3.9 percent rate, compared to 4.5 percent in the fourth quarter.
The amount of money left at the disposal of households after accounting for taxes and inflation increased at an only 0.4 percent pace after rising 1.7 percent in the prior quarter.
"Lower savings plus weak income is not a favorable combination for the consumption outlook," said Neil Dutta, an economist at Bank of America Merrill Lynch in New York.
Consumer confidence was little changed this month, a separate report showed. The Thomson Reuters/University of Michigan's final reading on the overall index on consumer sentiment inched up to 76.4 from 76.2 in March.
Inventories contributed just over half a percentage point to GDP growth compared to 1.81 percentage points in the fourth quarter. Still, that suggests that restocking could be a drag on second-quarter GDP growth.
Excluding inventories, GDP rose at a 1.6 percent rate. In the fourth quarter, the comparable figure was just 1.1 percent.
Rising in inflation pressures as energy prices soared also restrained GDP growth. A price index for personal spending rose at a 2.4 percent rate, accelerating from the fourth quarter's 1.2 percent pace.
A core measure that strips out food and energy costs advanced at a 2.1 percent rate, also quickening from 1.3 percent in the prior quarter.
(Reporting by Lucia Mutikani; Editing by Neil Stempleman and Diane Craft)