June 26, 2013 / 1:19 PM / in 6 years

First-quarter growth reading slashed in cautionary note on economy

WASHINGTON (Reuters) - The U.S. government slashed its estimate for first-quarter economic growth on Wednesday, offering a cautionary note on the recovery as the Federal Reserve ponders curtailing its massive monetary stimulus.

A woman carrying a Chanel shopping bag walks on Rodeo Drive in Beverly Hills, California, May 21, 2013. REUTERS/Fred Prouser

Gross domestic product expanded at a 1.8 percent annual rate in the quarter, the Commerce Department said. The economy was previously reported to have grown at a 2.4 percent pace after a gain of just 0.4 percent in the final three months of last year.

Almost all categories were revised lower, with the exception of home construction and government. Economists polled by Reuters had expected GDP growth would be unrevised.

The biggest surprise was consumer spending, which grew at a 2.6 percent pace, not the 3.4 percent rate previously estimated. The revision to consumer spending, which accounts for more than two-thirds of U.S. economic activity, sliced more than a half percentage point off the GDP growth rate.

Economists cautioned against reading too much into the data given its backward-looking nature, but said it could weigh on the Fed as it considers scaling back its bond buying.

“At the margin, it tilts them a little bit less strongly towards the tapering they were talking about a week ago,” said Sam Coffin, an economist at UBS in New York.

Fed Chairman Ben Bernanke said last week that the central bank could trim the $85 billion in bonds it is buying each month sometime later this year and likely bring the program to a close by mid-2014.

Those comments led to a sharp selloff in stock markets and drove the yield on the benchmark 10-year Treasury note to a nearly two-year high.

However, a range of strong U.S. economic data on Tuesday - from business spending plans to home prices - bolstered investor sentiment.

After closing higher on Tuesday, stocks resumed their ascent on Wednesday. Bonds were also up on the day, with yields falling.

The GDP report showed that homebuilding grew at a 14.0 percent rate in the first quarter, but a big jump in mortgage rates on the back of Bernanke’s remarks threatens to cool the sector.

Interest rates on fixed 30-year mortgages jumped more than a quarter point last week to an average 4.46 percent, the Mortgage Bankers Association said. That killed off refinance activity, although demand for loans to purchase a home edged higher.


The revision to consumer spending largely reflected weak outlays that non-profits made on medical care services on behalf of consumers, which economists tied to lower government spending on health care.

Even given the revision, consumer spending picked up from the fourth quarter despite a rise in taxes, and recent gains in consumer sentiment suggest households are not pulling back.

Growth in the first quarter was also weighed down by weak exports, which contracted at a 1.1 percent pace in the first quarter in a likely reflection of a global economic slowdown. They had previously been reported to have expanded.

Business spending barely grew, with investment on nonresidential structures declining more sharply than previously reported. The drop in spending on nonresidential structures was the first in two years.

The pace of inventory accumulation was revised marginally lower, but it still contributed more than half a percentage point to GDP growth given that it was up sharply from the fourth quarter.

Excluding inventories, GDP grew at a 1.2 percent rate, the slowest in two years.

Reporting by Lucia Mutikani; Editing by Andrea Ricci and Tim Ahmann

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