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US economy grows by 2.5pc in first quarter
The US economy expanded by 2.5pc in the first three months of the year, though a sharp fall in government spending and tepid growth in March meant the rebound from a lacklustre fourth quarter was weaker than expected.

The 2.5pc annual rise in US gross domestic product (GDP) comes after growth stalled at 0.4pc in the fourth quarter, according to the US Commerce Department. However, the increase missed economists' expectations for a 3pc rise.

The first quarter expansion was driven by a 3.2pc rise in consumer spending, which accounts for around 70pc of US economic activity, as Americans stepped up their spending despite January's 2pc payroll tax hike and a jump in petrol prices. This was the fastest rise since the fourth quarter of 2010, and compares with 1.8pc growth in the final three months of 2012.

However, recent data suggest that households reined in their spending in March, when retail sales fell by 0.4pc and manufacturing activity weakened substantially.

Farmers who replenished stocks of animal feed also helped to lift activity, after last summer’s drought decimated crops. Without this rise in inventories, the US economy grew by just 1.5pc.

Government spending also fell by 4.1pc, led by an 11.5pc decline in defence spending. Capital Economics said the decline in government spending over the past two quarters was the biggest six-month contraction since the end of the Korean War in the 1950s.

Analysts described the fall in government spending as a "huge drag" on the economy, and added that the $85bn (£54.9bn) in mandatory government spending cuts that began in March - known as the sequester - would continue to weigh on growth.

"This drag from government will continue because the sequester hasn't even kicked in the first quarter," said Jacob Oubina, senior US economist at RBC Capital Markets. "We lost a considerable amount of momentum in the last month and a half."

Friday's data also suggest that more Americans raided their savings to fund purchases. Incomes dropped by 5.3pc last quarter, while the saving rate fell to 2.6pc, its lowest since the end of 2007, from 4.7pc in the previous quarter.

Business spending on equipment and software also slowed to 3pc in the first quarter, following brisk growth of 11.8pc in the final three months of 2012.

"Add it up, and while this wasn’t a weak quarter, 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," said Avery Shenfield, chief economist at CIBC World Markets.

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