The U.S. economy grew at an annual rate of 1.8 percent in the first three months of the year, significantly slower than first thought. The steep revision occurred mostly because consumers spent less than previously estimated, a sign that higher taxes could be dampening growth.
The Commerce Department revised its estimate of economic growth for the January-March quarter down from a 2.4 percent annual rate. The revised rate was still faster than the 0.4 percent rate in the October-December quarter.
Economists had thought growth in the April-June quarter would be 2 percent or less. Analysts had also expected growth to strengthen in the second half of this year. The downgrade for the January-March quarter will likely change those estimates.
It might also affect the timing of the Federal Reserve's plan to scale back its bond-buying program. Chairman Ben Bernanke said last week that the Fed would likely start to slow its bond purchases later this year and end them next year if the economy continues to strengthen. The Fed's bond purchases have helped keep long-term interest rates low.
Jennifer Lee, senior economist at BMO Capital Markets, noted that the economy barely grew in the final quarter of last year. If the April-June quarter proves as weak as some analysts expect, the Fed will be looking at three quarters of subpar growth.
"The Fed won't taper under these conditions," Lee said. "They need convincing signs of a pickup."
Most of the revision to last quarter's growth was due to a drop in consumer spending to an annual rate of 2.6 percent. That's sharply lower than the 3.4 percent rate estimated last month. Consumer spending accounts for 70 percent of economic activity.
Much of the change reflected a lower estimate for spending on services such travel, legal services, health care and utilities.
Export growth was also trimmed, reflecting slower global growth. And business investment spending was much weaker than initially estimated. That was largely due to an even larger drop in spending on buildings than previously thought, a particularly volatile category.
An increase in Social Security taxes on Jan. 1 has reduced take-home pay for most Americans. A person earning $50,000 a year has roughly $1,000 less to spend, while a high-earning couple has $4,500 less.
Many economists had thought that the tax increase, along with steep government spending cuts, would start to affect consumers in the second quarter, which ends next week. But the revision suggests the tax increase may have hampered consumer spending a little earlier than thought.
The economy continued to be slowed by weakness in government spending. It fell during the first quarter at an annual rate of 4.8 percent. That shaved 0.9 percentage points from growth - the biggest negative factor. And it followed an even steeper decline in government spending during the fourth quarter.
Economists had predicted that economic growth would rebound to a rate of around 2.5 percent in the July-September quarter and to more than a 3 percent rate in the final three months of the year.
The Fed's latest economic projections are for growth of 2.3 percent to 2.6 percent this year. And it predicts that growth will accelerate next year to as much as 3.5 percent.
The latest reports have been encouraging. U.S. factories are fielding more orders. Home sales and prices are rising, signaling a stronger housing recovery. Spending at retail businesses rose in May. And employers added 175,000 jobs last month, which almost exactly matched the average increase of the previous 12 months.
Steady job growth has gradually reduced the unemployment rate to 7.6 percent from a peak of 10 percent in 2009. And it has lifted Americans' confidence in the economy to its highest point in 5½ years.
Consumers' confidence in the economy is watched closely because their spending accounts for about 70 percent of U.S. economic activity.