By Lucia Mutikani
WASHINGTON (Reuters) - The U.S. economy grew at its weakest pace in three years in the first quarter as consumer spending barely increased and businesses invested less on inventories, in a potential setback to President Donald Trump's promise to boost growth.
Gross domestic product increased at a 0.7 percent annual rate also as the government cut back on defense spending, the Commerce Department said on Friday. That was the weakest performance since the first quarter of 2014.
The economy grew at a 2.1 percent pace in the fourth quarter. Economists polled by Reuters had forecast GDP rising at a 1.2 percent pace last quarter. The survey was, however, conducted before Thursday's advance data on the March goods trade deficit and inventories, which saw many economists lowering their first-quarter growth estimates.
The pedestrian first-quarter growth pace is, however, not a true picture of the economy's health. The labor market is near full employment and consumer confidence is near multi-year highs, suggesting that the mostly weather-induced sharp slowdown in consumer spending is probably temporary.
A measure of private domestic demand increased at a 2.2 percent rate last quarter. First-quarter GDP tends to underperform because of difficulties with the calculation of data that the government has acknowledged and is working to rectify.
Even without the seasonal quirk and temporary restraints, economists say it would be difficult for Trump to fulfill his pledge to raise annual GDP growth to 4 percent, without increases in productivity.
Trump is targeting infrastructure spending, tax cuts and deregulation to achieve his goal of faster economic growth. On Wednesday, the Trump administration proposed a tax plan that includes cutting the corporate income tax rate to 15 percent from 35 percent, but offered no details.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, braked to a 0.3 percent rate in the first quarter. That was the slowest pace since the fourth quarter of 2009 and followed the fourth quarter's robust 3.5 percent growth rate.
The weakness in consumer spending is blamed on a mild winter, which undermined demand for heating and utilities production. Higher inflation, which saw the personal consumption expenditures index averaging 2.4 percent in the first quarter - the highest since the second quarter of 2011 - also weighed on consumer spending.
Government delays issuing income tax refunds to combat fraud also curbed consumer spending. But with savings rising to $814.2 billion from $778.9 billion in the fourth quarter, consumer spending is likely to pick up.
GDP "NOISY"
Economists believe Federal Reserve officials are likely to view both the anemic consumer spending and GDP growth as temporary when they meet next week. Fed Chair Janet Yellen has previously described quarterly GDP as "noisy."
The Fed is not expected to raise interest rates next week. The U.S. central bank lifted its overnight interest rate by a quarter of a percentage point in March and has forecast two more hikes this year.
After contributing to GDP growth for two straight quarters, inventory investment was a drag in the first quarter.
Businesses accumulated inventories at a rate of $10.3 billion in the last quarter, down from $49.6 billion in the October-December period. Inventories subtracted 0.93 percentage point from GDP growth, almost reversing the 1.0 percentage point contribution in the fourth quarter.
Government spending fell at a 1.7 percent rate as defense outlays declined at a 4.0 percent pace, the biggest drop since the fourth quarter of 2014. State and local government investment also fell.
There was some good news in the first quarter. Business investment improved further, with spending on equipment jumping at a 9.1 percent rate thanks to rising gas and oil well drilling as oil prices continue their recovery from multi-year lows.
Spending on mining exploration, wells and shafts surged at a record 449 percent rate after rising at a 23.7 percent pace in the fourth quarter, accounting for the rise in nonresidential structures investment.
Spending on nonresidential structures accelerated at a 22.1 percent pace in the first quarter after falling at a 1.9 percent rate in the prior period.
Investment in home building rose at a 13.7 percent rate. Exports rose at a 5.8 percent rate, outpacing the 4.1 percent rate of increase in imports. That left a smaller trade deficit, which had a neutral impact on GDP growth.