The US economy continued to stutter in the first quarter of the year, as growth undershot expectations and inflation fell. Official data released yesterday showed gross domestic product (GDP) growing at an annualised 1.6 per cent - barely higher than the feeble 1.4 per cent of the previous quarter and well below expectations averaging 2.3 per cent.

Soft consumer demand was compounded by a fall in business investment and unexpectedly slow growth in government spending. The rise in federal spending associated with the war in Iraq was offset by a fall in expenditures by state and local governments, which are struggling to balance budgets in the face of falling tax revenues.

"Feeble growth is not a sustainable situation with inflation this low and the labour market shedding jobs," said Mr Ethan Harris, chief US economist at Lehman Brothers in New York.

The White House seized on the GDP figures to argue that the economy needed its proposed tax cut.

"The president views today's release as one more reason that Congress should take action to pass a robust jobs growth plan," said Mr Ari Fleischer, White House spokesman.

But most economists think there will be little immediate stimulus value in the centrepiece of the administration's proposal: cutting taxes on stock dividends.

Stock prices and long-term interest rates fell after the GDP figures were released, in spite of a much more upbeat consumer confidence survey from the University of Michigan, suggesting that the public was relieved by the end of the war in Iraq.

The Michigan index, the Federal Reserve's favoured measure of household sentiment, jumped to 86 in April - low by historical standards but higher than expected and well above March's nine-year low of 77.6. Other figures released offered a mixed picture of the housing sector, another indicator of consumer confidence, with sales of new homes dropping in March but sales of existing homes rising. - (Financial Times Service)