US growth rate revised down to 1.8%

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The US economy grew by less than previously estimated in the first quarter of the year, the Commerce Department has said.

Gross domestic product - which measures annual economic output - grew at an annualised pace of 1.8%, down from an earlier estimate of a 2.4% rise.

Weak business investment, a slowdown in consumer spending and falling exports led to the downward revision.

In the final quarter of 2012, the annualised growth rate had been 0.4%.

The revised figure surprised analysts, who had expected it to remain unchanged at 2.4%.

US stocks rose as analysts said the revised figures could alter the Federal Reserve's intention to slow down its $85bn-a-month bond purchases, which was based on its anticipation that the economy will strengthen.

"If we end up with three consecutive quarters of sub-2% growth, the Fed won't taper under those conditions. They need convincing signs of a pick-up before they turn the taps," said Jennifer Lee, senior economist at BMO Capital Markets.

The Dow Jones closed up 150 points at 14,910.

Global stock markets had dropped sharply at the end of last week after Fed chairman Ben Bernanke said on Wednesday that the US central bank could start reining in its quantitative easing programme later this year and wind it up completely by mid-2014.

Tax impact

A breakdown showed that consumer spending, which accounts for three-quarters of US GDP, grew at a weaker pace of 2.6%, rather than the previously estimated 3.4%.

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What has happened today confirms that there is a significant speculative element in stock and bond prices, disconnected from economic reality”

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Exports, which were previously reported as having risen, actually shrank by 1.1%, due to the weak global economy. Imports also contracted by 0.4%.

Tax increases introduced in January and concerns about government spending cuts are thought to have forced households and businesses to delay spending and investment.

An increase in the Social Security taxes has reduced income for most Americans. A person earning $50,000 to $75,000 a year has about $1,000 less to spend, while a household with two high earners will have roughly $4,500 less.

The economy also continued to be slowed by cuts in government spending, which fell in the first quarter at an annual rate of 4.8%, shaving about 0.9 percentage points off growth.

Earlier this month the International Monetary Fund urged the US government to repeal the huge federal budget cuts introduced this year, denouncing them as "excessively rapid and ill-designed", and warning they would be a significant drag on growth this year.

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