Corporate profits contracted in the first quarter for the first time in more than two years and the economy grew at the same pedestrian pace as previously estimated, government data showed on Thursday.

Signs of the economy's struggle to regain speed were highlighted by an unexpected rise in the number of Americans applying for unemployment benefits last week.

There is no doubt the economy has slowed. We will call the first half of 2011 as a soft patch, said Robert Dye, a senior economist at PNC Financial Services in Pittsburgh. We should see growth accelerate in the second half in the 3.0 percent to 3.5 percent area.

After-tax corporate profits fell at a rate of 0.9 percent, the Commerce Department said, after rising at a 3.3 percent pace in the fourth quarter.

In its second estimate of the economy, the department said gross domestic product growth was unrevised at annual rate of 1.8 percent, below economists' expectations for a 2.1 percent pace.

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.

However, the rise in initial claims last week suggested the pace of hiring might be slowing. Initial claims for state unemployment benefits climbed to 424,000 from 414,000 the prior week, a separate report from the Labor Department showed.

Economists had forecast claims slipping to 400,000. Last week marked the seventh straight week in which claims topped the 400,000 level.

Stock index futures remained unchanged while bond prices shed losses and turned positive. The dollar extended losses versus yen.


Indications are that the sluggish growth tone persisted early in the second quarter, with retail sales lackluster and supply chain disruptions from the earthquake in Japan depressing motor vehicle production.

The economy expanded at a 3.1 percent rate in the fourth quarter.

Though overall GDP was unrevised, the report showed a bigger increase in restocking by businesses and slightly higher capital outlays, which helped to offset downward revisions to consumer spending.

Business inventories increased $52.2 billion, well above the initially reported $43.8 billion rise. The change in inventories added 1.19 percentage points to GDP growth.

But a decline in vehicle production so far in this quarter because of shortages of parts from Japan 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 non-residential structures was not as steep as previously estimated. Business spending grew at a 7.7 percent pace in the fourth quarter.

Consumer spending -- which accounts for more than two-thirds of U.S. 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 index rose at an unrevised 3.8 percent rate in the first quarter. That compared to the fourth quarter's 1.7 percent increase.

The core PCE index closely watched by the Fed advanced at a 1.4 percent rate rather than 1.5 percent. 12

While exports were much stronger than previously estimated, imports also accelerated, resulting in trade having a muted impact on growth.

Government spending contracted at a 5.1 percent rate rather than 5.2 percent, with defense outlays dropping at an unrevised 11.7 percent rate. (Reporting by Lucia Mutikani and Glenn Somerville; Editing by Neil Stempleman)