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Apr 28, 2012, 04.16 AM IST | Source: Reuters

Inventories, weak business spending curb US Q1 growth

USA-ECONOMY:Inventories, weak business spending curb US Q1 growth

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. economic growth cooled in the first quarter as businesses cut back on investment and restocked shelves at a slower pace, but the biggest rise in consumer spending in more than a year cushioned the blow.

Gross domestic product expanded at a 2.2 percent annual rate, the Commerce Department said on Friday, moderating from the fourth quarter's 3 percent rate.

Economists had expected somewhat firmer growth, but were taken by surprise by another big drop in defense spending. Still, growth was stronger than the 1.5 percent or less pace analysts had anticipated early in the quarter.

While the growth pace remained too slow to offer comfort to President Barack Obama as he seeks a second term, it did not appear weak enough to alter the wait-and-see stance on monetary policy at the Federal Reserve.

"There's nothing catastrophic happening, this is just slow growth and this underscores that the economy is on sound footing but nothing more," said Steven Baffico, chief executive at Four Wood Capital Partners in New York.

Even with the deceleration in growth, the United States is performing better than most advanced nations, with some economies in Europe already back in recession.

Government spending dropped for a sixth straight quarter as defense outlays fell and austerity at state and local governments showed few signs of easing.

A rise in demand for automobiles, which powered the largest pick up in consumer spending since the fourth quarter of 2010, helped offset the drag from government and business spending, which dropped for the first time since the recession ended.

The slump in business spending was likely to be temporary and related to the expiration of tax incentives for businesses, economists said. Corporations are sitting on a $2 trillion dollar cash pile.

In another heartening sign, home construction rose at its fastest pace since the second quarter of 2010, thanks to an unusually warm winter.

Economists said that while growth was not weak enough to spur the Fed into another round of bond buying, it still bolstered the central bank's view that interest rates should be kept near zero at least through late 2014.

Fed Chairman Ben Bernanke on Wednesday expressed comfort with the current policy stance, although he held out the prospect of more bond buying if the economy deteriorated.

"This report plays directly into the hands of those who want to keep rates low for a very long time," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

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