US economic growth regained speed in the first quarter, but not as much as expected, which could heighten fears the alreadyweakening economy could struggle to handle deep government spending cuts and higher taxes.

Households cut back on saving to fund their purchases

Gross domestic product expanded at 2.5 per cent annual rate, the Commerce Department said yesterday, after growth nearly stalled at 0.4 per cent in the fourth quarter. The increase, however, missed economists’ expectations for a three per cent growth pace.

Part of the acceleration in activity reflected farmers’ filling up silos after a drought last summer decimated crop output. Removing inventories, the growth rate was a tepid 1.5 per cent.

Given the smaller-than-expected increase and signs the economy has weakened in recent weeks, the GDP data will probably weigh on US stocks. It could also give ammunition for the Federal Reserve to maintain its monetary stimulus.

The US Central Bank, which meets next week, is widely expected to keep purchasing bonds at a pace of $85 billion a month.

Data ranging from employment to retail sales and manufacturing weakened substantially in March after robust gains in the first two months of the year. There are indications the weakness persisted into April. The GDP showed contributions to growth from all areas of the economy, with the exception of government, trade and investment by businesses in offices and other commercial buildings.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 3.2 per cent pace – the fastest since the fourth quarter of 2010. It grew at a 1.8 per cent rate in the fourth quarter of last year.

However, households cut back on saving to fund their purchases after incomes dropped at a 5.3 per cent rate in the first quarter – a bad sign for future spending growth.

The drop in income was the largest since the third quarter of 2009.

The saving rate – the percentage of disposable income households are stocking away – fell to 2.6 per cent, the lowest since the fourth quarter of 2007, from 4.7 per cent in the fourth quarter of 2012.

Much of the gains in first-quarter spending came from automobile purchases and outlays for utilities, which were boosted by unusually cold temperatures. Consumers managed to step up their spending despite the return of a two per cent payroll tax and higher gasoline prices.

Despite the spike in gasoline prices, inflation pressures were benign in the first three months of the year. An inflation gauge in the Government’s GDP report rose at a 0.9 per cent rate, the smallest increase since the second quarter of 2012. The personal consumption expenditure index had increased at a 1.6 per cent pace in the fourth quarter.

A core measure that strips out food and energy costs rose at a 1.2 per cent rate, still well below the Fed’s two per cent target. Core PCE had increased at a one per cent rate in the fourth quarter.

The lack of inflation should come as welcome relief for American households, but it could cause some nervousness at the US central bank, which may see it as a symptom of the economy’s weakness.

Another big contributor to growth in the fourth quarter was inventory accumulation, which added a full percentage point to GDP growth after chopping off 1.5 points from output in the final three months of last year.