Economic Growth Revised Lower

The economy expanded at a slower clip than previously estimated in the first quarter, according to a government report released Friday, with an upward revision in inflation providing further justification for an expected rate increase by the Federal Reserve next week.

In a separate report, the pace of existing-home sales in May hit a record high, but analysts said they expected higher mortgage rates to cool off housing demand in coming months. Consumer confidence rose, according to another report.

The nation’s gross domestic product, which tracks the value of all U.S.-produced goods and services, rose 3.9% in the first quarter compared with the final quarter of 2003, according to the final revision from the Commerce Department. A preliminary report had pegged the rate at 4.4%.

The downward revision made the first quarter the slowest for economic growth since last year’s second quarter and weaker than the 4.1% growth of the final quarter of 2003. The revision surprised many analysts, who had not expected any significant adjustment.

Analysts attributed the lower estimate to weaker exports and a downward revision in consumer spending. Imports, which reduce GDP results, were higher than estimated.

The core price index for consumer spending -- a measure, closely watched by Fed Chairman Alan Greenspan, that cuts out volatile food and energy prices -- rose at an annual rate of 2% in the quarter, versus the previously estimated 1.7%.

Higher inflation in recent months is expected to prompt the Fed’s policymaking committee to raise its benchmark short-term interest rate next week, the first such increase since 2000, economists said.

Despite the lower growth rate and higher inflation, the nation’s economy remains on sound footing as business investment increases, and an improving job market should support consumer spending, analysts said.

Economist Joshua Shapiro at consulting firm MFR noted that the strength of imports in part reflected a healthy economy and robust demand from U.S. consumers and businesses.

“Given that higher imports is a sign of economic strength, the downward revision to headline GDP growth ought not to be viewed as cause for concern,” Shapiro said in a report.

Meanwhile, the U.S. housing market remained robust in May, with existing-home sales increasing 2.6% from the previous month to a seasonally adjusted annual rate of 6.8 million units, according to the National Assn. of Realtors.

The figure topped industry estimates and exceeded the previous monthly high set in September, when the sales pace hit 6.68 million homes.

Existing-home sales in California, however, fell 1.3% in May from the previous month to a seasonally adjusted annual rate of 632,380, according to the California Assn. of Realtors. The median price, meanwhile, rose 2.9% to a record high of $465,160.

May’s record results may signal a peak in sales activity as mortgage rates are expected to head higher and eventually result in fewer sales.

“This may be the last peak in home sales for a while,” said David Lereah, chief economist at the National Assn. of Realtors. “Even so, they will remain at strong levels, and 2004 is on track to be a record.”

The national median existing-home price -- the point at which half the homes sold for more and half for less -- was $183,600 in May, up 10.3% from May 2003.

Separately, the University of Michigan’s final survey of consumer confidence for June showed its sentiment index rose to 95.6 from 90.2 in May.