By Corrie Driebusch 

U.S. stocks fell Friday after data showed a contracting U.S. economy and that consumers remain cautious.

The new data confirmed that the U.S. economy hit a slow patch in the first quarter, and called into question the prevailing narrative that the slowdown was just a blip.

Investors have closely watched economic growth for indications on whether the Federal Reserve may delay raising interest rates, which some investors worry may hurt stock performance.

"The market is in a wait-and-see mode to see, was the weakness in the first quarter temporary or was it something more permanent," said Anwiti Bahuguna, senior portfolio manager at Columbia Threadneedle Investments, which manages roughly $500 billion.

The Dow Jones Industrial Average declined 156 points, or 0.9%, to 17971. The S&P 500 lost 15 points, or 0.7%, to 2105, and the Nasdaq Composite shed 34 points, or 0.7%, 5064.

In May, investors pored over a raft of economic indicators. An apparent resurgence in home building seemed to suggest the U.S. economy is indeed improving. Others cast some doubt on an economic bounceback.

"The signs are encouraging, but it's not enough yet to change the direction of the market in a significant fashion," Ms. Bahuguna said.

The U.S. stock market has been fairly placid over the past month, with stocks inching higher and touching fresh records on muted trading volumes. In May only about 6.05 billion shares changing hands a day, making it the slowest month in trading since November, when about 6.04 billion shares were traded each day.

For the month, the Dow is up 1.6% through Thursday's close. The S&P 500 is up 1.7%.

On Friday, the Commerce Department said in its second reading of U.S. economic output for the first quarter gross domestic product shrank at a 0.7% rate. The initial reading of first-quarter GDP showed the U.S. economy slowed sharply, growing at just 0.2%.

Economists surveyed by The Wall Street Journal had expected that to be revised downward to a 1% contraction in Friday's reading.

Also weighing on stocks Friday morning was a decline in the Chicago Business Barometer, commonly known as the Chicago PMI, a survey of Chicago area purchasing managers that provides insight on companies' business plans. The decline, which put the index below 50, indicates that factory activity is contracting.

Separately on Friday, a reading on consumer sentiment showed U.S. consumer optimism in May was higher than expected but still down sharply from the end of April reading.

European stocks traded lower Friday amid fresh worries about Greece and its likelihood to secure a deal with its international creditors.

International Monetary Fund Managing Director Christine Lagarde said in a German newspaper interview that a Greek exit from the euro is a possibility, contradicting comments from European Central Bank officials. The Greek government, meanwhile, said Thursday that it aims to have a deal in place to secure fresh financing by Sunday.

Germany's DAX fell 2.3%, and France's CAC 40 dropped 2.5%.

So far this week, stocks have bounced around as investors grappled with news out of Greece, a mixed bag of economic data and a wave of new merger announcements.

On Thursday, U.S. stocks slipped, a day after the Nasdaq Composite hit a record. The Dow Jones Industrial Average lost 36.87 points, or 0.2%, to 18126.12. The S&P 500 declined 2.69, or 0.1%, to 2120.79. The Nasdaq Composite Index sank 8.62, or 0.2%, to 5097.98

In other markets, gold futures rose a fraction to $1189.00 an ounce. The yield on the 10-year Treasury note fell to 2.108% from 2.132% on Thursday. Yields fall as prices rise.

Crude-oil prices rose 3.3% to $59.59 a barrel.

In corporate news, GameStop Corp. shares rose 7.8% after the company reported higher first-quarter profits late Thursday as a result of new video and digital game downloads.

Shares of chip maker Altera Corp. rose 4.2% after reports that it is nearing a deal with rival Intel Corp, whose shares rose 1.2%.

Tommy Stubbington and Stephanie Yang contributed to this article.

Write to Corrie Driebusch at corrie.driebusch@wsj.com