WASHINGTON A drop in government spending dragged more on the U.S. economy than initially thought in the first three months of the year, although consumer spending looked relatively resilient to Washington's austerity drive.
Other reports on Thursday showed the number of new jobless claims rose modestly last week while contracts on previously owned homes climbed to a three-year high in April.
Together, the reports pointed to an economy that has held up reasonably well despite government constraints, but nevertheless faced headwinds severe enough to dissuade the U.S. Federal Reserve from trimming its monetary stimulus in the immediate future.
"(The reports) paint the picture of an economy with strengthening fundamentals that is facing significant fiscal drag," said Ellen Zentner, an economist at Nomura in New York.
Gross domestic product, a measure of the country's total economic output, expanded at a 2.4 percent annual rate during the first quarter, down a tenth of a point from an initial estimate, the Commerce Department said.
Analysts had forecast a 2.5 percent gain.
Government spending tumbled at a 4.9 percent annual rate, which was faster than the 4.1 percent rate initially estimated. Also holding back growth during the quarter, businesses outside the farm sector stocked their shelves at a slower pace.
Washington has been tightening its belt for several years but ramped up austerity measures in 2013, hiking taxes in January and slashing the federal budget in March.
"We are dramatically under-spending in Washington," said Michael Strauss, a market strategist at Commonfund in Wilton, Connecticut.
U.S. stocks rose and the dollar weakened as some investors bet the data could dissuade the Fed from rushing to taper a bond buying program that has acted as a bulwark against government belt tightening. Prices for U.S. government debt pared losses.
Despite the signs of a substantial fiscal drag, the GDP report also highlighted a resilience that has surprised many economists.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity. rose at a 3.4 percent annual rate, up two tenths of a point from the government's previous estimate.
Excluding the volatile inventories component, GDP rose at an upwardly revised 1.8 percent rate, slightly higher than analysts had forecast. This suggests that an improvement in hiring and incomes over the last year has helped keep economic momentum intact.
"(It's) steady as she goes," said Stephen Stanley, an economist at Pierpont Securities in Stamford, Connecticut
Most economists still expect economic growth will slow around the middle of 2013 as budget cuts are enacted. But growth is seen picking up by year end, propelled by consumer spending and an apparently entrenched housing market recovery.
In April, the National Association of Realtors' index of signed contracts for home resales rose 0.3 percent to 106.0, the highest reading since April 2010.
The housing market recovery is being driven by the Fed's very easy monetary policy stance, which has kept mortgage rates low. Although speculation the Fed could begin to curtail its bond buying within a few months has driven mortgage rates sharply higher in recent days, economists say the fundamentals of the housing recovery still appear strong.
A separate report showed the number of Americans filing new claims for unemployment benefits unexpectedly rose last week, but not enough to suggest a shift in the recent pattern of steady job gains.
Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 354,000, above analysts' expectations, Labor Department data showed.
(Additional reporting by Lucia Mutikani in Washington and Richard Leong in New York; Editing by Andrea Ricci)