US economic growth braked sharply to its slowest pace in two years as consumer spending softened and a strong dollar continued to undercut exports.

However, a pick-up in activity is anticipated given the buoyant US labour market. 

US gross domestic product increased at a 0.5% annual rate, the slowest since the first quarter of 2014, the Labor Department said today in its advance estimate. 

US businesses doubled down on efforts to reduce unwanted merchandise clogging up warehouses. 

The economy was also hit by cheap oil, which has hurt the profits of oil field companies like Schlumberger and Halliburton, resulting in business spending contracting at its fastest pace since the second quarter of 2009, when the recession was ending. 

Economists polled by Reuters had forecast the economy expanding at a 0.7% rate in the first quarter. The economy grew at a 1.4% pace in the fourth quarter. 

Almost all sectors of the economy weakened in the first quarter, with the housing market the lone star.

The slowdown in growth is likely temporary, given a fairly robust jobs market. Applications for unemployment benefits are near a 43-year low and employment gains averaged 209,000 jobs per month in the first quarter. 

In addition the US Institute for Supply Management's manufacturing and non-manufacturing surveys, which are closely correlated to economic activity, have rebounded in recent months. 

While the Federal Reserve last night acknowledged economic activity had "slowed," it also said labour market conditions had "improved further." 

The Fed appeared to view the threats from the global economy and financial markets as having diminished. 

It left its benchmark overnight interest rate unchanged and suggested it was in no hurry to tighten monetary policy further. It hiked rates in December for the first time in nearly a decade. 

Economists also say the model used by the US government to strip out seasonal patterns from data is not fully accomplishing its goal despite recent steps to address the problem. 

Residual seasonality has plagued first-quarter GDP, with growth underperforming in five of the last six years since the recovery started in June 2009.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 1.9% rate. That was the slowest since the first quarter of 2015 and was a deceleration from the fourth quarter's 2.4% rate. 

US households have been frugal, cutting back on purchases of car, despite cheap petrol. Households appear to have socked away modest wage gains from the tightening labour market and the petrol savings. They have also reduced their debt. 

Income at the disposal of households after accounting for taxes and inflation increased 2.9% in the first quarter after rising 2.3% in the previous three month period. Savings rose to a lofty $712.3 billion from $678.3 billion in the fourth quarter. 

Higher savings and a lower debt load augur well for an acceleration in consumer spending. 

Tepid consumer spending gave US businesses more reason to place fewer orders for goods and ramp up efforts to reduce an inventory bloat. 

In the first quarter, businesses accumulated $60.9 billion worth of inventory, down from $78.3 billion in the fourth quarter.