May 25 (Bloomberg) -- U.S. economic growth rose at an annual rate of 5.3 percent in the first quarter, slower than forecast and reflecting less momentum in consumer and corporate spending.

Stocks rose on signs the economy is expanding fast enough to boost company profits without igniting inflation. The rise in gross domestic product was the biggest since the third quarter of 2003 and compares with a 4.8 percent rate that was reported on April 28, the Commerce Department said. Sales of previously owned homes dropped to a three-month low, the National Association of Realtors also reported.

Last quarter's economic vigor may give way to a more moderate pace of growth for the remainder of 2006. Slower consumer spending and a weakening housing market will allow Federal Reserve policy makers to stop raising interest rates if additional data point to a smaller risk of accelerating inflation, economists said.

``Consumption and investment were a little softer than we were looking for,'' said John Shin, an economist at Lehman Brothers Holdings Inc. in New York. ``Reports since have certainly showed growth has decelerated, and that's consistent with the Fed's statement that growth will decline to a more sustainable rate.''

Economists estimated gross domestic product, the sum of all goods and services produced in the U.S., grew at an annual rate of 5.8 percent last quarter, based on the median forecast in a Bloomberg News survey. Estimates ranged from 5.1 percent to 6.2 percent.

Second Quarter

Morgan Stanley economists revised their second-quarter growth estimate to 2.8 percent from 2.9 percent, as the GDP report showed a smaller gain in spending and a bigger build in inventories.

``We expect the economy to grow around 3 percent to 3.5 percent over the balance of the year,'' said Allan Hubbard, director of the White House National Economic Council, in an interview. ``That means we will be creating more jobs than job entrants, which means the unemployment rate will continue to decline.''

The Standard & Poor's 500 Index increased 9.6, or 0.8 percent, as of 11:56 a.m. in New York. Treasury securities were little changed after the reports. The benchmark 10-year note yielded 5.03 percent. The dollar fell against the yen and euro.

Purchases of previously owned homes declined 2 percent in April to an annual rate of 6.76 million, the Realtors group reported. Sales were down 5.7 percent from a year earlier as rising mortgage rates put a brake on the housing market.

Median Home Price

The median price of an existing home in April rose 4.2 percent to $223,000 from a year earlier, the smallest increase since September 2001, according to today's report.

The labor market is also showing signs of cooling. An index of help-wanted advertising in U.S. newspapers fell to 35 last month, the lowest since 1961, from 37 in March, according to the Conference Board.

Also today, a Labor Department report showed first-time claims for jobless benefits dropped less than forecast. The number of Americans filing for unemployment insurance fell by 40,000 last week to 329,000. Economists forecast claims to drop to 315,000, according to the median estimate in a Bloomberg survey.

``We certainly have a slowdown on our hands,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``Companies are getting more cautious about hiring, but we should continue to see decent job growth of at least 150,000 jobs a month through the summer.''

Recent Reports

Government reports yesterday may herald slower growth. Durable goods fell more than expected last month as demand for aircraft, computers and defense hardware slowed. The inventory of unsold new houses climbed to a record, which may limit home- price appreciation.

The economy will grow at a 3.5 percent rate this quarter and at a 3 percent pace in the second half, according to the median estimate of economists surveyed by Bloomberg from April 28 to May 8.

Today's report also showed wages and salaries in the fourth quarter were revised down by a $45.5 billion annual rate.

The revision ``makes the current and future income numbers all the more important, as households will need accelerating labor income to make up for the drag of higher energy prices and the diminishing boost from housing wealth gains,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

Inflation Data

The government's core personal consumption expenditures price index, a measure of prices tied to consumer spending and excluding energy and food, rose at an annual rate of 2 percent last quarter.

Companies boosted inventories at an annual rate of $32.3 billion, compared with the $21.9 billion reported April 28.

Caterpillar Inc., the world's biggest maker of earthmoving equipment, said it had $600 million more in inventory in the first quarter compared with the same period last year.

``It's not unusual to build some inventory in the first quarter in preparation for the second quarter which historically is a seasonally strong quarter'' for deliveries, said Michael DeWalt, director of investor relations for Peoria, Illinois- based Caterpillar.

The trade deficit subtracted 0.55 percentage point from first-quarter growth instead of the 0.84 percentage point previously reported. Exports added 1.47 percentage points to first-quarter growth, more than the 1.21 percentage points previously reported. Imports subtracted 2.02 percentage points from growth last quarter.

Consumer Spending

Consumer spending, which accounts for more than two-thirds of the economy, expanded at a 5.2 percent annual pace, compared with the 5.5 percent rate initially reported. The revision reflected slower growth in spending on services, mainly due to less homeowner use of electricity and natural gas because of warmer temperatures.

Business fixed investment, which includes spending on commercial construction as well as equipment and software, grew at an annual rate of 13.1 percent in the first quarter, compared with a 14.3 percent gain reported earlier and a 4.5 percent increase the prior quarter.

The GDP report included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, or profits from current production, rose 7.9 percent at an annual rate. The first-quarter increase compares with a 14.4 percent increase in the final three months of last year and a 4 percent decline in the third quarter.

Corporate Profits

``Companies are in a good position to invest or to hire if they want to,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. ``Whether they'll loosen the purse strings is still a question, but they have plenty of ammunition to do so.''

Spending on equipment and software grew at an annual rate of 13.8 percent, revised from 16.4 percent. The increase followed a 5 percent rate of gain in the fourth quarter.

Home construction rose at an annual rate of 3.1 percent, compared with the 2.6 percent rate reported last month and a 2.8 percent gain the previous three months. Economists expect slower growth in coming months.

Supply of Homes

The supply of existing homes for sale rose 5.8 percent to 3.38 million, pushing inventories up to a six-month supply in April from 5.6 months.

``Right now the numbers we are seeing are soft-landing numbers,'' David Lereah, chief economist at the National Association of Realtors, said to reporters. Sales appear to be improving this month, he said, ``so hopefully the numbers I'm giving you today are a little bit of a bottom.''

Total home sales will slip 7.3 percent this year, the Realtors group forecast on May 9. The average rate on a 30-year fixed mortgage will reach 7 percent and the median price on an existing home will rise 5.7 percent to $232,000, the group said.

Toll Brothers Inc., the largest U.S. luxury-home builder, this week said earnings in the quarter ended April 30 rose 2.8 percent, the smallest gain in three years. The Horsham, Pennsylvania-based company also trimmed its 2006 forecast.

Federal Reserve

The Fed is expecting a deceleration in housing to help slow the economy.

``Housing is clearly cooling,'' Fed Bank of Dallas President Richard Fisher said on May 22 after a speech in Dallas. ``All of us are looking at the impact on consumption of the cooling of the housing sector.''

Fed policy makers are trying to discern whether the economy will slow enough to assuage inflation concerns and allow a pause at its next meet meeting on June 28-29. The Fed has raised the benchmark U.S. interest rate 16 straight times in two years to keep inflation in check.

``We have a lot to learn from the data that will come out from now to June 28-29,'' said Fisher, a non-voting member of the Fed's rate-setting Open Market Committee.

Gross domestic product, the total value of goods and services generated during the period, rose to $11.4 trillion at an annual rate for the quarter after adjusting for inflation.

Before inflation, GDP grew at an 8.8 percent annual pace to $13 trillion for the quarter.

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To contact the report on this story:
Joe Richter in Washington  jrichter1@bloomberg.net