The US economy grew more slowly than previously thought in the first quarter, the government said, though there were signs of potential improvement ahead in new jobless claims data.
Weighed down by Iraqi war worries, which constrained business spending, gross domestic product crept ahead at a 1.4 per cent annual rate in the first quarter.
That was less than the 1.9 per cent pace the Commerce Department estimated a month ago, and matched the rate for the final quarter of 2002.
Economists expect second-quarter GDP, which the government estimates in a month, also to be soft.
The latest data came the day after the US Federal Reserve, worried about the lumbering pace of growth and the risk of deflation, lowered its key federal funds rate by a quarter percentage point to one per cent, the lowest level since 1958. It was the 13th cut since January 2001.
Fed policy-makers said they expected economic growth to improve over time and noted recent signs of firmer spending and "stabilising" labor markets.
Economists said that while the data were relatively old, covering only the first three months of the year, they still reflected the seriousness of the economy's loss of momentum.
"The first-quarter slowing of real GDP is very much in keeping with the rationale behind the latest rate cut," said economist John Lonski of Moody's Investors Service in New York. "The deceleration of GDP reminds us of the difficult environment faced by corporations as they attempt to regain financial health."
Separately, the Labour Department said new applications for jobless benefits fell last week to the lowest level since March 22 - upbeat news for the US labour market, where the unemployment rate stands above six per cent.
A total of 404,000 workers filed for unemployment insurance payments at state offices in the June 21 week, down 22,000 from a revised 426,000 a week earlier.
"We've seen claims come down four out of the last five weeks, which is encouraging," said Gary Thayer, chief economist at A.G. Edwards and Sons. Growth is too weak yet to generate many jobs, though, and the Conference Board said Thursday that its Help-Wanted Advertising Index remained stuck at 36 in May, the same as in April.
Stock market investors were heartened by the data, especially the hint of job-market improvement. The Dow Jones Industrial Average added 67.51 points, or 0.75 per cent, to 9,079.04, while the tech-laced Nasdaq Composite Index rose 31.35 points, or 1.96 per cent, to 1,634.01.
But bond prices sank, partly on continuing investor disappointment that the Fed's rate reduction was smaller than some had hoped. The 10-year note sank 1-6/32 points as its yield rose 3.55 per cent from 3.41 per cent. The 30-year bond fell 1-22/32, taking its yield to 4.57 per cent from 4.46 per cent.
The GDP report said inventories rose at a $4.8 billion annual rate in the first quarter, about a third of the $13.2 billion rate estimated a month ago, in a sign of corporate reluctance to stockpile goods in the face of the pending war with Iraq.
Analysts said lower inventories were a potential plus for the economy in coming months. Peter Kretzmer, an economist with Bank of America Corp. in New York, noted "the implication (is) that any pickup in demand is more likely to be met by accelerating production."
Business investment was weak. Nonresidential spending, which includes investment in buildings and computers, fell at a 4.4 per cent rate in the first quarter after rising 2.3 per cent in the closing three months of 2002. Within this category, equipment and software spending dropped for the first time in a year, declining at a 4.8 per cent rate in contrast to the fourth quarter of last year's 6.2 per cent gain.
Many private-sector forecasts expect second-half growth to speed up to an annual rate around three to 3.5 per cent, near the rate considered the US economy's potential long-term expansion rate.
In a separate report, the Federal Reserve Bank of Chicago said its National Activity Index, which includes 85 economic indicators on everything from production rates to housing starts, firmed up in May.