(Bloomberg News) The U.S. economy grew at a slower pace than forecast in the first quarter as government spending declined by the most since 1983.

Gross domestic product rose at a 1.8% annual rate from January through March after a 3.1% pace in the last three months of 2010, the Commerce Department said today in Washington. Economists projected 2% growth, according to the median estimate in a Bloomberg News survey.

To keep spurring the expansion, Federal Reserve policy makers said yesterday they'll complete their $600 billion round of stimulus through June. While slower than the previous three months, a reflection of higher gasoline prices, consumer spending climbed more than projected in the first quarter.

"We've sputtered a bit here, especially coming off a relatively strong fourth quarter," said Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who accurately forecast first-quarter growth. Even with the higher costs for fuel and food, "consumers are going to continue to spend. Growth should pick up toward the 3% level" later this year, he said.

GDP estimates from 80 economists surveyed by Bloomberg ranged from 0.5% to 3.5%. The first-quarter pace was the slowest since April through June of last year. For all of 2010, the world's largest economy expanded 2.9%, the most in five years, after shrinking 2.6% in 2009.

More Claims

New applications for jobless benefits unexpectedly rose last week to the highest level in three months. Unemployment insurance claims jumped by 25,000 to 429,000, the Labor Department said. The government anticipates a drop in unadjusted claims during the week leading up to the Easter holiday, something that didn't happen this year, a Labor Department spokesman said.

Consumer confidence in the U.S. fell last week for the first time in a month as rising gasoline prices hurt household finances, another report showed. The Bloomberg Consumer Comfort Index decreased to minus 45.1 in the period ended April 24, the lowest level since the end of March, from minus 42.6 the prior week. Measures of personal finances and buying climate dropped, indicating households may limit purchases as fuel costs rise.

Stocks were little changed after the reports and Treasury securities rose. The Standard & Poor's 500 Index was at 1,355.22, down less than 0.1%, at 9:52 a.m. in New York. The yield on the benchmark 10-year Treasury note, which moves inversely to prices, fell to 3.32% from 3.36% late yesterday.

Fed View

Slower first-quarter growth explains why the Fed trimmed its 2011 forecast to 3.1% to 3.3%, according to its latest so-called central tendency, released yesterday. In January, the central bankers projected 3.4% to 3.9% expansion.

"I would say roughly most of the slowdown in the first quarter is viewed by most on the committee as transitory," Fed Chairman Ben S. Bernanke said at a news conference in Washington following the central bank's policy meeting yesterday.

Household purchases, which account for about 70% of the economy, rose at a 2.7% pace last quarter after a 4% gain in the final three months of 2010.

The gain in consumer spending from January through March compared with a 2% median forecast in the Bloomberg survey. Purchases added 1.91 percentage points to growth.

Government Outlays

Government purchases fell at a 5.2% annual rate, the biggest drop since 1983, after a 1.7% decrease in the fourth quarter. National defense spending dropped at an 11.7% pace, the most since 2005. Federal government spending fell the most in 11 years.

Residential construction fell at a 4.1% rate, while the trade deficit subtracted 0.1 percentage point from GDP, today's report showed.

Manufacturing industries, which account for 11% of the economy, are likely to remain at the forefront of the recovery on growing demand from abroad and the need to replenish inventories.

Inventories last quarter were stocked at a $43.8 billion pace, compared with a $16.2 billion rate in the fourth quarter. Excluding inventories, the economy climbed at a 0.8% annual rate from January through March, the slowest since the third quarter 2009.

Spending on equipment and software climbed at an 11.6% annual last quarter, up from 7.7% the previous three months.

'Sustained Growth'

"After a period of widely fluctuating demand in late 2008 through last year, we anticipate that 2011 will be the beginning of a period of sustained growth in our truck engine markets in the U.S.," Thomas Linebarger, chief operating officer of Cummins Inc., said on an April 26 teleconference.

The Columbus, Ind.-based maker of diesel engines projects 2011 sales to be up 30% from last year, compared with a previous forecast for a 20% gain.

United Parcel Service Inc., the world's biggest package- delivery company, this week bolstered its full-year forecast after revenue per package climbed in all its sectors during the first quarter.

The gains reflect "some of the increased velocity in the core economy with manufacturing and finished goods," Kurt Kuehn, chief financial officer of the Atlanta-based firm, said in an April 26 telephone interview.

UPS and FedEx Corp. handle goods ranging from financial documents to pharmaceuticals and industrial parts, making them economic bellwethers.

Inflation

The Fed's preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed to a 1.5% annual pace. The Fed's longer term projection for inflation is a range of 1.7% to 2%. Rising oil and food costs may push up the prices of other goods and services.

"Increases in the prices of energy and other commodities have pushed up inflation in recent months," the Federal Open Market Committee said yesterday in its statement after a two-day meeting in Washington. Still, "longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued," the Fed said.

Bernanke has signaled that the Fed will maintain record stimulus until job growth accelerates and the recovery is robust enough to withstand tighter credit.