The U.S. economy expanded at a 3.2 percent annual rate in the first quarter as consumers stepped up spending, suggesting the recovery was growing more durable.
While growth slowed from the fourth quarter's rapid 5.6 percent pace and was a touch weaker than economists expected, the details of the report from the Commerce Department on Friday were fairly upbeat.
We continue to see a nice bounce back in output. We believe the second quarter is likely to be equally robust, said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
Analysts polled by Reuters had forecast GDP, which measures total goods and services output within U.S. borders, growing at a 3.4 percent rate in the first three months of 2010.
U.S. stock index futures trimmed gains after the data, while prices for government debt were flat. The U.S. dollar was little changed at lower levels versus the euro.
The report showed consumer spending accelerating at a 3.6 percent rate in the January-March period, more than double the 1.6 percent pace in the fourth quarter and the biggest rise since the first quarter of 2007.
Consumer spending, which normally accounts for 70 percent of U.S. economic activity, added 2.55 percentage points to GDP last quarter, the biggest percentage contribution since the fourth quarter of 2006.
There have been worries the U.S. recovery, which has been led by the manufacturing sector as businesses begin to rebuild inventories, could sputter if consumers did not come on board. These concerns are beginning to take a back seat.
We're seeing the beginning of the process of a broad-based recovery, said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.
The U.S. Federal Reserve on Wednesday noted economic activity had continued to strengthen in recent weeks and the labor market was starting to improve.
However, saying it sill expects a modest recovery, it left benchmark overnight lending rates near zero and renewed its vow to keep them low for an extended period.
Business inventories increased $31.1 billion in the first quarter as businesses restocked to meet firming domestic demand, the first increase since the first quarter of 2008. Inventories contributed 1.57 percentage points to GDP, less than half the contribution in the last three months of 2009 when businesses became less aggressive in clearing their warehouses.
When businesses slow the rate at which they are liquidating inventories, manufacturers raise production and this boosts GDP. Inventories fell $19.7 billion in the last quarter of 2009.
Excluding inventories the economy expanded at a 1.6 percent rate in the first quarter following a 1.7 percent pace in the fourth quarter.
Businesses continued to spend on software and equipment, though a bit less vigorously than in the prior quarter. This still bodes well for the economic recovery. Business investment rose at a 4.1 percent rate after a 5.3 percent pace in the fourth quarter.
If they are spending on equipment already, it shows a lot of confidence for the future hiring which supports consumer spending. If we continue to have employment growth, we will have a good year, said Kurt Karl, head of economic research at Swiss Re in New York.
Last month the economy enjoyed the strongest jobs growth in three years as private employers stepped up hiring.
New home construction, which showed some hesitancy early this year, was a drag on growth in the first quarter -- after two quarters of gains. Residential investment contracted at a 10.9 percent rate after growing at a 3.8 percent pace in the fourth quarter.
Spending on structures subtracted from GDP for a sixth straight quarter. Export growth slowed sharply to a 5.8 percent pace in the first quarter from a 22.8 percent rate in the prior period, while imports rose at an 8.9 percent rate. That left a trade deficit that chipped off 0.61 percentage point from first-quarter GDP.
(Additional reporting by Chris Reese in New York; Editing by Andrea Ricci)