Economy Expands at 1.9% Clip in First Quarter

The U.S. economy slowed as expected in the first quarter, but a less robust pace of consumer spending and export growth than previously estimated could dampen the economic outlook for the current period.

Gross domestic product increased at a 1.9% annual rate, the Commerce Department said in its final reading on Thursday, unchanged from its estimate last month. That was in line with economists' expectations.

However, when measured from the income side, the economy grew at a 3.1% pace in the first quarter, up from 2.6% in the previous quarter. The tepid first-quarter pace of GDP growth was a step-down from the October-December period's 3.0% rate.

It also reflected a slightly less sturdy accumulation of inventories by businesses and slower pace of investment in equipment and software than previously estimated.

Consumer spending, which accounts for about 70% of U.S. economic activity, increased at a 2.5% rate in first quarter, rather than the previously reported 2.7% pace. There are signs that consumer spending slowed in the second quarter, with retail sales falling in April and May. Business inventories increased $54.4 billion, instead of $57.7 billion, adding only 0.10 percentage point to GDP growth compared with 0.21 percentage point in the previous estimate.

Excluding inventories, the economy grew at a revised 1.8% rate in the first quarter, rather than 1.7% and up from 1.1% in the fourth quarter. Exports grew at a 4.2% rate instead of 7.2%. While the careful of management of inventories could be a boost to second-quarter growth, the mild downward revision to consumer spending underscores the loss of momentum in the economy that has been evident in weak hiring and slowing factory activity.

Second-quarter growth is forecast around 2%, but with global demand cooling amid Europe's debt woes and an uncertain fiscal policy path at home forcing households to be cautious, even that estimate might be too optimistic. Business spending on equipment and software was revised down to show a 3.5% growth rate instead of the previously reported 3.9%. Anecdotal evidence suggests the pace softened in the second quarter.

The drag from the revisions to consumer spending, equipment and software, exports and inventory accumulation was offset by upward revisions to investment in residential and nonresidential structures. Import growth was lowered by 3.4 percentage points to a 2.7% rate. While that supported growth during the quarter, it was a sign of weakening domestic demand. Government spending fell at a 4.0% rate, instead of the previously reported 3.9%.

The department also revised after-tax corporate profits to a 5.7% rate of decline instead of 4.1%. That was still the biggest decline since the fourth quarter of 2008 and reflected the end of a special tax bonus that allowed U.S. companies to accelerate the depreciation of assets.