By Josh Mitchell and Ben Leubsdorf 
 

WASHINGTON--The U.S. economy expanded more than previously thought in the first three months of the year, but the subdued pace overall suggests it remains vulnerable to a new round of global economic turmoil.

Gross domestic product, the broadest measure of goods and services produced across the U.S., grew at a seasonally adjusted annual rate of 1.1% in the first quarter, the weakest pace in a year, the Commerce Department said Tuesday. The agency previously estimated the economy grew at a 0.8% pace.

Economists surveyed by The Wall Street Journal had expected the latest estimate to show 1% growth.

The main factors behind the upward revision: The U.S. exported more good and services than previously thought during the period. And companies spent more than initially estimated on software and research and development.

But total business investment still declined compared with the prior quarter, falling at the fastest pace since the third quarter of 2009. And spending by everyday Americans--the lifeblood of the world's largest economy--was weaker than previously thought. Consumer spending in the first quarter grew at the slowest pace in two years, the fresher data showed.

The report--the agency's third estimate for growth in the first quarter---highlighted troubling developments that are keeping the economy from achieving the robust growth that lifted the middle class in the late 1980s and throughout the 1990s. Depressed oil prices--while helping consumers save at the pump--are sapping business investment as energy firms scale back drilling projects. Coal producers are similarly cutting payrolls and projects. Export growth has stalled due to broad weakness in foreign markets, hurting American factories.

The economy has made a habit of stumbling in the early months of the year only to rebound in the spring and summer, and this year appears no different. Recent economic reports suggest gross domestic product grew at a rate of between 2.5% and 3% in the three-month period that ends Thursday.

Economists believe growth in consumer spending and strong sales of cars and homes will allow the U.S. to continue to expand despite the fallout of the U.K.'s vote last week to leave the European Union.

"The available indicators point to a noticeable step-up in GDP growth in the second quarter," Federal Reserve Chairwoman Janet Yellen testified before Congress last week. "In particular, consumer spending has picked up smartly in recent months, supported by solid growth in real disposable income and the ongoing effects of the increases in household wealth. And housing has continued to recover gradually, aided by income gains and the very low level of mortgage rates."

The Fed is debating whether to raise short-term interest rates this year. The central bank indicated earlier this year that it could move this summer, but the likelihood of an increase that soon has diminished due to fears that the U.K. move, known as Brexit, and slower job growth in the U.S. could weigh on the overall economy.

The weak household spending in the first quarter represents a new red flag. Economists have expected consumer spending--representing more than two-thirds of demand in the economy--to be stronger due to a slight pickup in wages and cheap gasoline.

Tuesday's report showed consumer spending grew at a 1.5% annual pace in the first quarter, replacing the prior estimate of 1.9%, including a downward revision to spending on services like transportation and recreation.

Meanwhile, a key measure of business spending on equipment, buildings and software fell for the second straight quarter. Nonresidential fixed investment declined at a 4.5% rate, instead of the previously reported 6.2% drop.

Exports rose 0.3%, instead of falling 2% as previously reported.

Corporate profits--as measured after tax and without inventory valuation and capital consumption adjustments--grew 3.3%, up from the initially reported gain of 1.9%.

The economy grew 2.1% in the first quarter compared to the same period a year earlier. The current expansion is among the longest in modern U.S history, but growth has also been weak compared to other growth periods. The economy expanded 2.4% in both 2014 and 2015. Many forecasters predict growth will be slightly weaker this year, at about 2%.

The Commerce Department's GDP report can be accessed at: http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Write to Josh Mitchell at joshua.mitchell@wsj.com and Ben Leubsdorf at ben.leubsdorf@wsj.com.

(END) Dow Jones Newswires

June 28, 2016 08:45 ET (12:45 GMT)

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