U.S. economy grew more last quarter than initially thought, boosting chances of Fed rate hike

Economic growth at the start of the year wasn’t as bad as initially estimated, boosting the chances that Federal Reserve policymakers will raise a key interest rate next month.

The nation’s total economic output -- also known as gross domestic product -- increased at a 0.8% annual rate from January through March, the Commerce Department said Friday.

Though that was still weak growth, it was an improvement over the initial estimate last month of 0.5%. That would have been the worst quarterly performance in two years.

In the second of three revisions to the quarterly growth figures, the Commerce Department said that the decline in business inventory investment was less severe than in last month’s report.

Gross private domestic investment decreased by 2.6% in the first quarter from the previous quarter, instead of the initial estimate of a 3.5% decline.

Still, that drop combined with declines in exports and federal government spending to cause the economy to slow from the 1.4% annual pace in the fourth quarter of last year.

In addition, consumers were more cautious in the first quarter as concerns about global growth triggered a steep downturn in financial markets.

Consumer spending increased 1.9% from January through March, down from 2.4% in the fourth quarter and the weakest showing in a year.

Economists expect much stronger overall economic growth in the April-through-June period.

A closely watched model from the Federal Reserve Bank of New York forecasts that the economy is growing at a 2.9% annual rate in the second quarter. That would be the fastest pace in a year.

Such a rebound would increase the likelihood that Fed policymakers will nudge up a key interest rate when they meet June 14-15.

Analysts are eagerly anticipating possible hints from Fed Chairwoman Janet L. Yellen when she makes public comments at Harvard University on Friday.

Fed officials indicated in the minutes of their April meeting that a small 0.25 percentage point increase in the benchmark federal funds rate “likely would be appropriate” in June if the economic growth was improving in the second quarter, the labor market was continuing to strengthen and inflation was showing signs of increasing.

In recent days, central bank policymakers have signaled a rate hike could be coming next month. Yellen could bolster those signals when she answers questions from Harvard economist Gregory Mankiw at a ceremony in which she will receive the university’s Radcliffe Medal as “an individual who has had a transformative impact on society.”

jim.puzzanghera@latimes.com

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