US economy expanded by lower-than-expected 2.5% in first three months of year

The American economy expanded at a rate of 2.5 per cent in the first three months of the year, according to new figures released today, performing far better than at the end of 2012 but missing expectations as falling government spending proved a drag on growth.

Underpinning the expansion, which was less than the 3 per cent rate predicted by economists, was a rise in consumer spending. It climbed by 3.2 per cent over the first quarter, the best pace since the end of 2010. However, the rise came as consumers compensated for falling household incomes by putting less money away for savings - something that bodes ill for future spending.

The squeeze on government spending, meanwhile, was all too obvious. It sank by 4.1 per cent. Political disagreement in Washington means that the US economy must absorbed $85bn in government spending cuts this year, another factor that is likely to dim growth prospects in coming months.

The overall result is that while the first quarter GDP report was better than the one for the final three months of 2012, when the US economy expanded by just 0.4 per cent, the underlying figures gave ample grounds for caution. For policymakers at the US Federal Reserve, the figures are likely to reinforce the view that while the economic backdrop is much improved since the dark days of the credit crunch, it remains challenging, warranting a continuation of the central bank's stimulus measures. The Fed is currently buying up around $85bn of government and mortgage-related bonds every month to support the recovery.