Slow Growth Amid Sluggish Job Gains

The U.S. economy slowed more than initially thought in the first quarter amid smaller gains in consumption and inventories, while corporate profits picked up. Separately, two measures of the labor market indicated continued sluggish job growth.

Gross domestic product increased at a 1.9% annual rate from January through March, the Commerce Department said Thursday. In its original report a month ago, the department estimated an increase of 2.2% in first-quarter GDP, the broadest measure of all the goods and services produced in an economy.

The number of U.S. workers filing new applications for unemployment benefits jumped last week, a potential signal that job creation continues to slow. Meanwhile, Private businesses hired at a very modest pace in May and manufacturers let go of workers, according to a report released Thursday by payroll giant Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

Still, companies registered their biggest quarterly gain in profits since the end of 2009 in the first three months of 2012. Corporate profits—after tax and unadjusted for inventories and capital consumption—increased at an 11.7% annual rate from the previous quarter. Profits were up 14.8% year on year in the first quarter, Commerce said.

The economy has cooled off since expanding at the fastest pace in a year and a half in the final quarter of 2011, with a 3.0% growth rate. But the fourth-quarter acceleration was driven partly by companies aggressively restocking inventories to catch up with demand.

Thursday's report showed that the inventory buildup was even less than expected in the first quarter, with the contribution to GDP falling to just 0.2 percentage point from 0.6 percentage point.

Consumer spending was also slightly weaker than expected, rising 2.7% instead of 2.9% as initially thought. Still, that marked the biggest gain in consumption since the fourth quarter of 2010.

Meanwhile, government spending continued to weigh on the recovery, with the drop revised down to 3.9% from 3.0%, mostly on the back of weakening state and local finances.

An unexpected pickup in business spending helped to partially offset downward revisions elsewhere, with investment in areas like software and industrial equipment rising 1.9%. Nonresidential fixed investment was initially estimated to have declined 2.1% in the first quarter.

Last month, Federal Reserve lifted its forecast on growth for this year, to between 2.4% and 2.9%. But Fed Chairman Ben Bernanke warned after the policy-setting meeting that "it's a little premature to declare victory."

One lingering uncertainty is whether the moderate pace of growth would be enough to bring down unemployment and spur demand. Friday's monthly employment report is expected to show a modest pickup in job creation, with the addition of 155,000 nonfarm payrolls in May. But the unemployment rate is expected to remain at 8.1%.

Another concern is the recent flare-up in inflation, though the most recent data have largely validated the Fed's view that the pressures would be temporary, as oil prices have receded from their highs.

The GDP report continued to show a buildup in inflationary pressures in the first quarter. The price index for personal consumption increased 2.4%, as previously estimated. That was double the rate of the fourth quarter.

The closely watched core PCE gauge, which excludes volatile food and energy prices, remained up 2.1%. That was up from the 1.3% rise in the fourth quarter.

Jobless Claims Increase

Initial jobless claims rose by 10,000 to seasonally adjusted 383,000 in the week ended May 26, the Labor Department said Thursday. It was the biggest jump in claims since the first week of April.

Economists surveyed by Dow Jones Newswires had forecast 370,000 new claims would be filed last week.

The four-week moving average of claims, which smooths out week-to-week volatility, increased by 3,750 last week to 374,500. Claims for the week ended May 19 were upwardly revised to 373,000 from the initially reported 370,000.

Labor officials said there was nothing unusual about the weekly data but numbers from five states were estimated due to the Memorial Day holiday.

Before this week, the pace of layoffs had leveled off during May after a spike in April. That gave hope that the economy would add more jobs in May after a lackluster reading the prior month. The government releases the latest payroll figures Friday.

In April, the economy added just 115,000 jobs, the second consecutive month job creation failed to top the 200,000.

The slowdown in hiring, coupled with worries about the ability of the U.S. and Europe to tackle fiscal challenges has caused increased concern among some economists in recent months.

The Federal Reserve, charged with maintaining price stability and achieving maximum employment, forecasts that unemployment will only edge down to between 7.8% and 8.0% by the end of this year. April's unemployment reading was 8.1% and economists expect it to remain unchanged in May.

If the labor market doesn't improve, the Fed could reconsider measures to stimulate the economy, such as another round of bond buying.

Thursday's report showed the number of continuing unemployment benefit claims—those drawn by workers for more than a week—decreased by 36,000 3,242,000 in the week ended May 19. Continuing claims are reported with a one-week lag.

The number of workers requesting unemployment insurance was equivalent to 2.6% of employed workers paying into the system in the week ended May 19, the same as the prior week.

Private Sector Adds 133,000 Jobs

Private-sector jobs in the U.S. increased 133,000 this month, according to a national employment report calculated by payroll processor Automatic Data Processing Inc. and consultancy Macroeconomic Advisers.

The gain was below economists' median expectation of 150,000 contained in a survey done by Dow Jones Newswires.

The April data were revised to show an advance of only 113,000 instead of the 119,000 increase reported earlier.

The ADP survey tallies only private-sector jobs, while the Bureau of Labor Statistics' nonfarm payroll data, to be released Friday, include government workers.

Growth in nonfarm payrolls has been anemic over the past two months. In April, only 115,000 jobs were created.

Economists surveyed by Dow Jones Newswires expect total nonfarm payrolls increased by 155,000 in May, and the jobless rate is projected to remain at 8.1%.

The weak ADP measure may cause economists to alter their payrolls forecast.

The latest ADP report showed large businesses with 500 employees or more added 9,000 employees in May, while medium-size businesses added 57,000 workers and small businesses that employ fewer than 50 workers hired 67,000 new workers.

Service-sector jobs increased by 132,000, and factory jobs fell by 2,000.

ADP, of Roseland, N.J., says it processes payments of one in six U.S. workers. Macroeconomic Advisers, based in St. Louis, is an economic-consulting firm.

On Wednesday, TrimTabs Investment Research said its calculation of May payrolls showed a "disappointing" gain of only 124,000.

Trimtabs uses daily tax deposits to calculate the monthly change in payrolls.

—Kathleen Madigan, Jeffrey Sparshott and Andrew Ackerman contributed to this article.

Write to Tom Barkley at tom.barkley@dowjones.com and Eric Morath at eric.morath@dowjones.com