On Thursday May 26, 2011, 11:01 am EDT

By Lucia Mutikani

WASHINGTON (Reuters) – Unexpectedly weak consumer spending kept the economy stuck in a slow growth gear in the first quarter and would likely struggle to regain speed amid signs of a slowdown in the pace of job creation.

Data on Thursday showed the economy expanded at an unrevised 1.8 percent annual rate in the first three months of this year, while the number of Americans claiming unemployment benefits unexpectedly rose 10,000 to 424,000 last week.

The rise in jobless claims and the weakness in first-quarter consumer spending, which offset upward revisions to business inventories and investment, set the tone for more lackluster growth this current quarter.

“The economy hit a slow patch in first quarter,” said Julia Coronado, chief North America economist at BNP Paribas in New York.

“We think that will be extended into the second quarter owing to supply chain disruptions resulting from events in Japan and continued high headline inflation that is robbing consumer purchasing power.”

The economy expanded at a 3.1 percent rate in the October-December period and economists had expected the first-quarter pace to be revised up to 2.1 percent.

The dollar extended losses versus the yen and the Swiss franc after the data and government bond prices rose. Stocks opened down.

WEAK CONSUMER SPENDING

Consumer spending — which accounts for more than two-thirds of economic activity — expanded at a much slower 2.2 percent rate in the first three months of this year instead of 2.7 percent.

After rising at a 4 percent clip in the fourth quarter, spending was dampened by high food and gasoline prices, which sent inflation rising at its fastest pace in 2-1/2 years.

The personal consumption expenditures price index rose at an unrevised 3.8 percent rate in the first quarter. That compared to the fourth quarter’s 1.7 percent increase.

However, the core PCE index, which is closely watched by the Fed, advanced at a 1.4 percent rate.

The soft consumer spending overshadowed a $52.2 billion increase in business inventories, which was well above the initially reported $43.8 billion rise. The change in inventories added 1.19 percentage points to gross domestic product growth.

But a decline in vehicle production so far in this quarter because of shortages of parts from Japan following the March earthquake could cause a drawdown in inventories and weigh on growth in the April-June period.

Motor vehicle output added 1.28 percentage points to first-quarter GDP.

Business investment rose at a 3.4 percent rate instead of 1.8 percent as the drop in spending on nonresidential structures was not as steep as previously estimated. Business spending grew at a 7.7 percent pace in the fourth quarter.

The report also showed after-tax corporate profits fell at a rate of 0.9 percent in the first-quarter after rising at a 3.3 percent pace in the fourth quarter.

The drop in profits, the first since the fourth quarter of 2008, likely reflected a slowdown in productivity growth as businesses stepped up hiring. Economists had expected corporate profits to grow at a 2.3 percent pace.

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