U.S. economic growth accelerated in the first quarter, but not as much as expected, the government said in a report Friday that could increase concerns the economy, which is currently slowing, could struggle to handle sharp government spending cuts and higher taxes on workers. The Commerce Department reported that gross domestic product (GDP) expanded at a 2.5 percent annual rate in the January-March period, rebounding from the extremely weak 0.4 percent rate seen in the fourth quarter of 2012. However, the first-quarter increase was significantly below economist expectations of a 3 percent growth pace. Worse, many economists believe GDP growth is slowing in the current April-June quarter to a rate of only 2 percent, and most expect growth to remain around that weak level for the rest of the year. GDP is the broadest gauge of the economy's health, measuring the total output of goods and services produced in the United States. The first-quarter GDP report showed contributions to growth from several areas of the economy. Consumer spending, which accounts for 70 percent of U.S. economic activity, increased at a 3.2 percent annual pace, the fastest since late 2010. It grew at a 1.8 percent pace in the fourth quarter of last year. Some GDP growth was attributed to farmers filling up silos after a drought last summer hurt crop output. Excluding inventories, GDP growth was a weak 1.5 percent. Households lowered their saving rate to fund purchases after incomes fell at a 5.3 percent in the first quarter-a bad sign for future spending growth. The drop in income was the biggest since late 2009. The saving rate-the percentage of disposable income households save-fell to 2.6 percent, the lowest since late 2007, from a 4.7 percent rate in the fourth quarter of 2012. Government spending plunged at a 4.1 percent annual rate, led by another deep cut in federal defense spending. Broad government spending cuts that started in March are expected to limit growth for the rest of the year, while higher taxes have begun to make some consumers and businesses cautious.
