RTTNews - Economic activity in the first three months of the year contracted by less than previously expected, according to a report released by the Commerce Department on Thursday, although the report also showed a downward revision to the pace of consumer spending growth.

The report showed that gross domestic product fell 5.5 percent in the first quarter compared to the 5.7 percent decrease that had been reported. The revision came as a surprise to economists, who had expected the drop in GDP to be unchanged at 5.7 percent.

With the upward revision, the pace of contraction in GDP in the first quarter marks a somewhat more notable slowdown compared to the 6.3 percent drop seen in the fourth quarter.

Nariman Behravesh, chief economist at IHS Global Insight, said the slightly less bad first quarter sets the stage for an even smaller drop in the second quarter and a trough in the third quarter.

Behravesh expects economic activity to contact by 2.5 to 3.0 percent in the second quarter followed by a more of less flat performance and around 1 percent growth in the fourth quarter.

The Commerce Department said that the smaller than previously reported drop in first quarter GDP reflected an upward revision to inventory investment and a downward revision to imports, which are a subtraction in the calculation of GDP.

As mentioned above, however, the report also showed a downward revision to the pace of consumer spending growth, which was revised to show an increase of 1.4 percent compared to the previously reported 1.5 percent increase.

The increase in spending still marks a notable turnaround compared to the steep declines seen in the two previous quarters.

The rebound in consumer spending contributed to the slower pace of contraction compared to the fourth quarter along with a larger decrease in imports.

Nonetheless, the positive contributions were partly offset by larger decreases in private inventory investment and in spending on non-residential structures.

In its statement announcement its decision to leave interest rates unchanged on Wednesday, the Federal Reserve noted that information received since its April meeting suggests that the pace of economic contraction is slowing.

The Fed said conditions in financial markets have generally improved and housing spending has shown further signs of stabilizing.

While the Fed said economic activity is likely to remain weak for a time, its expects policy actions to stabilize the financial markets, fiscal and monetary stimulus, and market forces to contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In other economic news, the Labor Department released a report on Thursday showing that first-time claims for unemployment benefits unexpectedly increased in the week ended June 20th.

The report showed that initial jobless claims rose to 627,000 from the previous week's revised figure of 612,000. Economists had expected jobless claims to edge down to 600,000 from the 608,000 originally reported for the previous week.

With the unexpected increase, jobless claims remained above the 600,000 level for the twenty-first consecutive week.

The Labor Department said that the increase was partly due to an increase in layoffs in the education services sector due to the end of the school year.

Peter Boockvar, equity strategist at Miller Tabak, said, The number is just a reminder that the road to recovery will be a very long one with still many twists and turns.

Even if the economy stops getting worse, until it starts generating at least 100,000 jobs per month, the unemployment rate is still going higher, Boockvar added.

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