US economy grows at 2.2% annual rate, less than forecast

April 27 (Bloomberg) -- The U.S. economy expanded less than forecast in the first quarter as the biggest gain in consumer spending in more than a year failed to overcome a diminished contribution from business inventories.

Gross domestic product, the value of all goods and services produced in the U.S., rose at a 2.2% annual rate after a 3% pace, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 2.5% rise. Household purchases increased 2.9%, exceeding the most optimistic projection. Homebuilding grew the fastest in almost two years.

Consumer confidence this month unexpectedly rose to the highest level in a year, another report showed, signaling household spending may continue to propel sales at retailers like Target Corp. and cushion the economy from cooling business investment and overseas trade. The report confirms the view of Federal Reserve officials who this week said they expect “moderate” growth as they repeated borrowing costs are likely to stay low at least through late 2014.

“Consumers are remarkably stable and steady,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, who correctly estimated first-quarter GDP. “We’ll need to see final demand continue to improve. We’re still in muddling-along territory.”

The Standard & Poor’s 500 Index fell less than 0.1% to 1,399.2 at 10:20 a.m. in New York. Treasuries were little changed, with the 10-year note yield at 1.94%.

Consumer Confidence

The Thomson Reuters/University of Michigan’s final index of sentiment increased to 76.4 from 76.2 last month. The gauge was projected to hold at the 75.7 level initially reported earlier this month, according to the median forecast in a Bloomberg survey of economists.

Forecasts for GDP among the 85 economists in the Bloomberg survey ranged from gains of 1.2% to 3.6%. The GDP estimate is the first of three for the quarter, with the other releases scheduled for May and June when more information becomes available.

In addition to the pickup in consumer purchases and homebuilding, the economy also benefited from a jump in auto production. GDP was restrained by a drop in government spending and slower growth in business investment in equipment and in inventories.

The U.S. is doing better than some of the other major economies. The U.K. economy slipped into its first double-dip recession since the 1970s, figures showed this week. In Japan and Germany, gross domestic product dropped in the final three months of 2011, while China, the world’s second-largest economy, is also cooling.

‘Where the Strength Is’

“The U.S. is where the strength is,” Sandy Cutler, chairman and chief executive officer at Eaton Corp., said on an April 23 conference call with analysts. “The markets outside the U.S. are not where the strength is this year.”

The Cleveland-based company predicted its U.S. markets, including electrical, hydraulics, aerospace, truck and automotive, will rise 9% this year, up from an earlier estimate of 6%. For its markets abroad, Eaton reduced its growth forecast to 2% from 4%, Cutler said.

Jobs and the economy are a central theme in political sparring between President Barack Obama and Republican challenger Mitt Romney. Obama’s job approval rating reached 50% in a Gallup Daily tracking poll for April 21-23. The telephone survey of 1,534 adults has a margin of error of plus or minus 3 percentage points. The 50% approval mark is notable because all incumbent presidents since Dwight Eisenhower at or above the level at the time of the election were re- elected, according to Gallup.

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