US Economy Expands Less Than First Estimated

The U.S. economy grew in the first quarter 3%, a slower pace than previously calculated, reflecting smaller gains in consumer and business spending.

Consumer spending, which accounts for about 70 percent of the economy, rose at a 3.5 percent pace last quarter, compared with the 3.6 percent the government estimated last month and a 1.6 percent gain in the prior three months. The first-quarter increase was the biggest since 2007.

Company earnings increased 5.5 percent in the first quarter after climbing 8 percent in the previous three months. Earnings were up 31 percent from the same time last year, the biggest year-over-year gain since 1984, one reason why hiring and spending on capital equipment is improving.

Today’s report also revised household earnings data covering the past two quarters. Wages and salaries decreased by $13.2 billion in the last three months of 2009, a downward revision of $30.3 billion. The figures, which incorporate new data on bonuses and stock options, indicate employment may have been weaker at the end of last year than current data show.

The gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating growth, grew at a slower pace than GDP before adjusting for inflation during the past two quarters. According to Fed research, GDI is a better gauge of the economy, signaling growth may be overestimated.

Business spending on new equipment and software advanced at a 12.7 percent pace last quarter after advancing at a 19 percent rate the previous three months, the biggest gain since 1998, today’s report showed. Spending on structures, including office buildings and factories, dropped at a 15.3 percent pace in the first quarter.

Households are gaining confidence this quarter as employment improves, and manufacturing is powering ahead as business investment and exports keep growing. The setback in stocks and rebound in the dollar caused by Europe’s financial troubles may cool spending here and abroad, giving the Federal Reserve additional scope to keep interest rates low.

Since then, mounting concern over the sovereign-debt crisis in Europe has rattled global financial markets. The Standard & Poor’s 500 Index is down 8.7 percent from March 31 through yesterday, and the dollar index, which tracks the currency’s performance against six major currencies including the euro and yen, is up 7.6 percent.



US Economy Expands Less Than First Estimated, Bloomberg
5/27/2010 9:40:51 AM