WRAPUP 6-U.S. economy expands as consumer spending picks up

* US economy expands at 3.2 pct pace in Q1

* Consumer spending growth more than doubles

* Business investment rises, homebuilding stumbles

* Midwest manufacturing activity hits 5-year high
(Updates with closing market action)

By Lucia Mutikani

WASHINGTON, April 30 (BestGrowthStock) – The U.S. economy expanded
at a 3.2 percent annual rate in the first quarter as consumers
increased spending at the fastest pace in three years, the
strongest sign yet a sustainable recovery may be taking hold.

While growth slowed from the fourth-quarter’s rapid 5.6
percent pace and was a touch weaker than economists expected,
the details of Friday’s report from the Commerce Department
were fairly upbeat.

President Barack Obama, whose popularity numbers have
suffered because of public discontent over the economy, hailed
the data as a step in the right direction, but stressed more
needs to be done.

“Our economy is stronger, that economic heartbeat is
growing stronger,” Obama said at the White House. “While
today’s GDP report is an important milepost on our road to
recovery, it doesn’t mean much to an American who has lost his
or her job and can’t find another.”

High unemployment remains a sore point as the economy
climbs out of its worst recession since the 1930s.

While the economy has now grown for three straight quarters
at an average of 3.7 percent, widespread joblessness is hurting
Obama’s approval ratings and dimming his fellow Democrats’
prospects for November elections, in which they face a fight to
keep their majorities in both houses of Congress.

Consumer spending, which normally accounts for about 70
percent of U.S. economic activity, added nearly 2.6 percentage
points to gross domestic product growth last quarter — the
biggest contribution since the fourth quarter of 2006.

“The growth appears to be more organic in terms of the
consumer being the driver. We need to make sure it’s followed
up with additional more broad-based gains,” said Daniel Penrod,
a senior analyst at the California Credit Union League.

MARKETS DISAPPOINTED

But stock market investors were disappointed growth fell
short of the 3.4 percent analysts had expected. Combined with
reports of a federal criminal probe of Goldman Sachs (GS.N: ),
stocks on Wall Street posted their worst week since January.

U.S. government debt prices rallied, tapping a safe-haven
bid, while the dollar fell for a third straight day against the
euro on hopes debt-stricken Greece would soon receive emergency
aid.

Consumer spending rose at a 3.6 percent rate in the
January-March period, more than double the fourth quarter’s 1.6
percent pace and the biggest gain since the start of 2007.

“Consumers don’t seem as panicked as they were last year
and they are beginning to unleash some of the pent-up demand,”
said Ryan Sweet, a senior economist at Moody’s Economy.com in
West Chester, Pennsylvania.

“But that pace of (spending) growth is unsustainable. We’re
going to see a more cautious consumer over the next few months
because we still have a nearly double-digit unemployment
rate.”

The United States has emerged from recession more swiftly
than Europe or Japan. Euro zone first-quarter GDP data due in
mid-May is expected to show annualized growth of roughly 0.8
percent. Japan, which has been struggling with deflation, does
not report its data until later in May.

Analysts said the welcome but moderate pace of U.S. growth
meant the Federal Reserve could bide its time before raising
benchmark interest rates from their current levels near zero,
particularly with unemployment hovering near 10 percent.

FED SEEN ON HOLD

“This should provide additional comfort for the majority on
the (Fed’s policy panel) that will look to keep rates on hold
into 2011,” said Joseph Brusuelas, chief economist at Brusuelas
Analytics in Stamford, Connecticut.

The central bank on Wednesday noted activity had
strengthened and that the labor market was starting to improve.
Still, it said it expects a modest recovery and renewed its vow
to keep rates low for an extended period.

The Commerce Department report showed that business
inventories increased $31.1 billion in the first quarter,
adding 1.57 percentage points to GDP growth, as firms restocked
to meet rising demand. It was the first inventory increase
since the first quarter of 2008.

Businesses also continued to spend on software and
equipment, though a bit less vigorously than in the prior
quarter, boding well for the economic recovery and jobs.

Last month, the economy registered its strongest jobs
growth in three years as private employers stepped up hiring.

“If they are spending on equipment already, it shows a lot
of confidence for 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.

But new home construction was a drag on growth in the first
quarter after two straight quarters of gains, with residential
investment contracting at a 10.9 percent rate.

Business spending on structures subtracted from GDP for a
sixth straight quarter. A bigger trade deficit as export growth
slowed sharply also weighed on first-quarter GDP.

Signs of a durable economic recovery were bolstered by
other reports showing manufacturing activity in the Chicago
area rose to a five-year high and increased for a ninth
consecutive month in New York City.

Separately, the Thomson Reuters/University of Michigan’s
Surveys of Consumers showed sentiment falling in April from
March as consumers saw the recovery as well underway, but slow.
However, their view on how the economy will look 12 months from
now improved from the prior month.
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U.S. GDP: http://link.reuters.com/qur22k

Stock Today

Consumer sentiment: http://link.reuters.com/zet22k
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WRAPUP 6-U.S. economy expands as consumer spending picks up