Economic growth trimmed on business and consumer spending

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June 26, 2010 5:00 AM EST

Economic growth was slower than previously reported in the first quarter as estimates of business and consumer spending were cut.

In its final estimate on the first quarter on Friday, the Commerce Department said gross domestic product expanded at a 2.7 percent annual rate instead of the 3 percent pace it reported last month.

Although the growth pace was below market expectations for a 3 percent rate, it still marked three straight quarters of expansion as the economy digs out of its most brutal downturn since the 1930s.

However, recent data have suggested the recovery lost some momentum in the second quarter, with persistently high unemployment restraining consumer spending, and home building and purchases faltering.

U.S. stock index futures cut gains on the report, while government debt prices rose. The U.S. dollar extended declines against the yen.

"You are getting growth in fits and starts, rather than an outright contraction. We are not generating real income growth that we like. It's a recovery that has a real weight on its back," said Paul Ballew, chief economist at Nationwide in Columbus, Ohio.

The Federal Reserve this week struck a cautious note on the economy and said the recovery was "proceeding." The economy is, however, not expected to fall back into recession.

The U.S. central bank left overnight lending rates in a zero to 0.25 percent range and renewed its commitment to an ultra low interest rate policy.

GDP, which measures total goods and services output within U.S. borders, grew at a 5.6 percent pace in the fourth quarter.

Growth in the January-March period was held back by business spending, which only rose at a 2.2 percent rate instead of 3.1 percent as reported last month.

Spending on structures was revised down to show a slightly bigger decline than reported last month. Growth in software and equipment investment was also lowered to a 11.4 percent rate from 12.7 percent.

Business spending rose at a 5.3 percent pace in the fourth quarter. Another drag on growth came from exports whose growth was eclipsed by a rise in imports, resulting in a trade deficit that subtracted from GDP.

State and local governments also weighed, with their spending falling at the sharpest pace since the second quarter of 1981.

Weak investment in home building chipped away at growth in the first quarter. The decline in home construction followed two-straight quarters of growth and underscored the fragility of the housing market's recovery from a three-year slump.

Growth in consumer spending was also revised down to a 3 percent rate. Although the rise was below the 3.5 percent pace reported last month, it was still more than double the 1.6 percent pace in the fourth quarter and the largest advance in three years.

Consumer spending, which normally accounts for more than two-thirds of U.S. economic activity, added 2.13 percentage points to GDP last quarter, also the largest contribution since the first quarter of 2007.

However, real final sales to domestic purchasers, considered a better measure of domestic demand, rose at a 1.6 percent rate instead of the 2.0 percent pace reported last month.

Growth was also supported by business inventories, which rose $41.2 billion rather than the $33.9 billion reported last month. The change in inventories contributed 1.88 percentage points to first quarter GDP. Weak demand during the recession forced businesses to slash stocks to record low levels and the rise in inventories was the first in two years.

The GDP report also showed after tax corporate profits rose 5 percent in the first quarter, rather than the 2.1 percent increase estimated last month. Profits increased 6.5 percent in the final three months of 2009.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)

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