US economic growth regained speed in the first quarter, but not as much as expected, which could heighten fears the already weakening economy could struggle to cope with deep government spending cuts and higher taxes.
Gross domestic product expanded at 2.5pc annual rate, the Commerce Department said on Friday, after growth nearly stalled at 0.4pc in the fourth quarter.
The increase, however, missed economists' expectations for a 3pc growth pace.
"It wasn't the bang-up start to the year we had hoped for, and the signals from March suggested that we will only decelerate from here into the spring trimester," said Avery Shenfeld, chief economist at CIBC World Markets Economics in Toronto.
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 1.5pc.
While consumer spending increased solidly, it came at the expense of saving, which does not bode well for future growth.
Given the smaller-than-expected increase and signs the economy has weakened in recent weeks, U.S. stock index futures fell, while prices for Treasury debt rose. The dollar weakened against the yen.
The GDP report could also give ammunition for the Federal Reserve to maintain its monetary stimulus. The U.S. central bank, which meets next week, is widely expected to keep purchasing bonds at a pace of $85bn a month.
"They are going to mark down their economic assessment. The second quarter is tracking closer to 1pc," said Jacob Oubina, a senior U.S. economist at RBC Capital Markets in New York.
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 report 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 U.S. economic activity, increased at a 3.2pc pace - the fastest since the fourth quarter of 2010. It grew at a 1.8pc rate in the fourth quarter of last year.
However, households cut back on saving to fund their purchases after incomes dropped at a 5.3pc rate in the first quarter. The drop in income was the largest since the third quarter of 2009.
The saving rate - the percentage of disposable income households are socking away - fell to 2.6pc, the lowest since the fourth quarter of 2007, from 4.7pc 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 2pc 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 0.9pc rate, the smallest increase since the second quarter of 2012. The personal consumption expenditure index had increased at a 1.6pc pace the fourth quarter.
A core measure that strips out food and energy costs rose at a 1.2pc rate, still well below the Fed's 2pc target. The core PCE index had increased at a 1pc 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 U.S. central bank, which may see it as a symptom of the economy's weakness.
Business spending on equipment and software slowed sharply, growing at an only 3pc rate after a brisk 11.8pc pace in the fourth quarter.
Economists caution that it is too early to blame the cooling in business investment and other more recent signs of economic softness on the $85bn in mandatory government spending cuts, known as the sequester, that began on March 1.
Homebuilding marked an eighth straight quarter of growth, though the pace moderated from the fourth quarter. Housing added to growth last year for the first time since 2005 and its recovery should help ensure the economy does not contract.
While export growth rebounded, it was outpaced by imports, resulting in a trade deficit that cut off half a percentage point from output.