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WRAPUP 5-Consumers hold back US growth, rebound seen muted
May 26, 2011 / 1:08 PM / in 6 years

WRAPUP 5-Consumers hold back US growth, rebound seen muted

 * First-quarter growth unrevised at 1.8 pct
 * Consumer spending weaker than previously thought
 * After-tax corporate profits fall, first drop in 2 years
 * Initial jobless claims rise to 424,000 last week
 (Adds details, updates markets)
 By Lucia Mutikani
 WASHINGTON, May 26 (Reuters) - Unexpectedly weak consumer
spending hobbled the U.S. economy in the first quarter and
fresh signs of a slowdown in the labor market pointed to an
uphill struggle for the recovery.
 The economy grew at an annual 1.8 percent rate in the first
three months of this year, the Commerce Department said on
Thursday, unchanged from an earlier estimate and weaker than
most forecasts.
 A separate report from the Labor Department showed the
number of Americans claiming unemployment benefits unexpectedly
rose last week by 10,000 to 424,000.
 Some of the slowdown in growth was linked to bad weather in
early 2011 and an 11.7 percent drop in defense spending, trends
which are expected to reverse in the second quarter.
 But economists were less hopeful about the expected
bounce-back in growth, citing the rise in jobless claims and a
moderation in factory output, which has been hit by disruptions
to supply chains after the March earthquake in Japan.
 "The second-quarter rebound is likely to be muted," said
Nigel Gault, chief U.S. economist at IHS Global Insight in
Lexington, Massachusetts.
 Estimates for second-quarter gross domestic product growth
currently range between 2.5 percent and 3.5 percent but could
be revised down. Recent data, including retail sales and
regional manufacturing surveys, all point to soft growth.
 The economy expanded at a 3.1 percent rate in the
October-December period. Economists had expected the
first-quarter pace to be revised up to 2.1 percent.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
 INSTANT VIEW: US jobless claims up [ID:nN26222348]
 Graphic - US jobless claims: r.reuters.com/fek79r
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 WEAK CONSUMER SPENDING
 Investors on Wall Street brushed aside the data and bought
stocks. U.S. government bond prices rallied, getting a boost by
flight-to-safety buying on concerns about the European
sovereign debt crisis. The dollar fell against a basket of
currencies.
 Despite the economy's seven straight quarters of expansion,
growth has been tepid by historical standards, leaving both the
Obama administration and opposition Republicans scrambling for
ideas to put it on a faster track.
 The White House on Thursday announced measures to reduce
the costs of complying with government regulations for
businesses, while Republican lawmakers unveiled job-creation
proposals -- which were largely a repackaging of policies they
have long advocated. [ID:nN26252196] [ID:nN26231928]
 Consumer spending -- which accounts for more than
two-thirds of U.S. economic activity -- expanded at a 2.2
percent rate in the first three months of this year, slower
than the previously reported 2.7 percent.
 After rising at a 4 percent clip in the fourth quarter,
spending was clipped by high food and gasoline prices, which
sent inflation soaring at its fastest pace in 2-1/2 years.
 The personal consumption expenditures price index rose at
an unrevised 3.8 percent rate in the first quarter. That
compared to the fourth quarter's 1.7 percent increase.
 The core PCE index, which is closely watched by the Federal
Reserve, advanced at a 1.4 percent rate, the quickest pace
since the fourth quarter of 2009.
 Fed officials would like to see this measure close to 2
percent. The slower growth pace means the U.S. central bank
will be in no hurry to raise interest rates once it concludes
its $600 billion, government bond-buying program in June.
 "This may put off the day where the Fed starts normalizing
interest rates until even further down the road," said Chris
Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi
UFJ in New York. "The Fed is going to want to see GDP above 3
percent certainly before taking their foot off the gas."
 Although consumer spending pulled back in the first
quarter, economists are hopeful that a recent cooling of energy
and food prices will ease the burden on household budgets and
boost spending.
 The soft consumer spending overshadowed a $52.2 billion
increase in business inventories, which was well above the
initially reported $43.8 billion rise.
 But a decline in vehicle production so far in this quarter
because of shortages of parts from Japan could cause a drawdown
in inventories and weigh on growth in the April-June period.
 Motor vehicle output added 1.28 percentage points to
first-quarter GDP.
 The GDP report also showed after-tax corporate profits fell
at a rate of 0.9 percent in the first-quarter after rising at a
3.3 percent pace in the fourth quarter.
 The drop in profits, the first since the fourth quarter of
2008, likely reflected a slowdown in productivity growth as
businesses stepped up hiring. Economists had expected corporate
profits to grow at a 2.3 percent pace.
 However, last week's rise in initial claims suggested the
pace of hiring might be slowing. Economists had forecast claims
slipping to 400,000. Last week marked the seventh straight week
in which claims topped the 400,000 level which economists say
is normally associated with steady job growth.
 "The weakness in the jobless claims data has persisted too
long to ignore and suggests that the labor market, which had
been a bright spot in the first quarter, is turning a bit
softer in the second quarter," said Michael Feroli, an
economist at JPMorgan in New York.
 (Reporting by Lucia Mutikani and Glenn Somerville; Editing by
Neil Stempleman and Kenneth Barry)


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