WASHINGTON, April 30 (Reuters) - U.S. economic growth picked up in the first quarter on a rebound in government spending after a crippling government shutdown, but the increase is likely temporary as the war with Iran drives up gasoline prices and squeezes household budgets.
Gross domestic product increased at a 2.0% annualized rate last quarter, the Commerce Department's Bureau of Economic Analysis said in its advance GDP estimate on Thursday.
In the October-December quarter, economic growth slowed to a 0.5% pace as a contraction in federal government outlays lopped off 1.16 percentage points, the most since the first quarter of 1994. Economists polled by Reuters had forecast GDP growth increasing at a 2.3% annualized rate. Estimates ranged from a 0.2% pace of contraction to a 3.9% growth rate. Much of the growth came from a partial reversal in government outlays.
An artificial intelligence spending boom and the building of data centers underpinning the technology continued to support business spending on equipment. But growth in consumer spending, the main engine of the economy, slowed further. It was losing momentum even before the U.S.-Israel war with Iran raised the average U.S. gasoline price to above $4 a gallon.
Americans have grown frustrated with the rising cost of living, with most disapproving of President Donald Trump's stewardship of the economy, a political risk for the Republican Party heading into congressional midterm elections in November.
The economy's growth pace likely supports financial market expectations that the Federal Reserve will hold interest rates steady, possibly into 2027, as long as there is no deterioration in the labor market. The U.S. central bank on Wednesday left its benchmark overnight interest rate in the 3.50%-3.75% range, noting rising concerns about inflation.
Employment growth averaged 68,000 jobs per month in the first quarter compared to the monthly gain of 20,000 during the same period last year. The labor market has slowed significantly compared to 2023 and 2024, with some economists blaming Trump's trade and immigration policies, which they said had reduced labor demand and the supply of workers.
The soft labor market has cooled wage growth. Tariffs have raised prices of some goods, even though the pass-through to official inflation numbers has been fairly moderate. Economists said consumers have relied on savings or have been saving less to maintain their spending, which they said could not continue indefinitely. The saving rate was 4.0% in February.
Higher inflation could offset some of the anticipated stimulus from tax cuts, economists warned. The boost from larger tax refunds was expected to fade soon, leading to what they said would be weaker spending this year.
Economists expect the war in the Middle East to weigh on economic growth from the second quarter.
Reporting by Lucia Mutikani; Editing by Paul Simao and Chizu Nomiyama
