US economic growth much weaker in first quarter than expected

STORY: The U.S. economy grew at a much slower pace in the first quarter than predicted.

A government report out Thursday showed gross domestic product rose 1.1% in the first three months of the year -- when economists anticipated a gain of 2%. The economy grew 2.6% in the fourth quarter.

An acceleration in consumer spending was offset by businesses cutting back on inventory investment in anticipation of weaker demand this year amid higher borrowing costs. While business spending on equipment contracted for a second straight quarter.

Credit conditions have tightened following recent financial market turmoil, which together with the Federal Reserve's fastest rate hiking cycle since the 1980s have raised the risks of a recession in the second half of the year.

The Federal Reserve is on track to increase interest rates by another quarter point next week, which is expected to be the last hike in the current cycle.

Economic activity surged in January, which economists attributed to unseasonably mild weather and difficulties adjusting the data for seasonal fluctuations. Reports since then have showed weakness including retail sales which slumped in February and March.

However the labor market remains tight and a separate report out Thursday showed initial claims for state unemployment benefits were lower than forecast.