Consumer spending, which accounts for about 70 percent of economic activity, fell to 2.6 percent from the 3.4 percent that was estimated last month, showing that consumers slowed their purchases as they adjusted to smaller paychecks following the expiration of the payroll tax cut on Jan. 1.
So far this year, economic data has generally reflected that consumers and the economy had weathered the tax hikes. Employers added 175,000 jobs in May, consumer and home builder confidence is on the rise and the housing market recovery is picking up pace.
Federal Reserve Chairman Ben Bernanke has said that the combination of tax hikes and across-the-board spending cuts that hit in the first quarter would create a drag on the economy through at least the summer.
Last week, Bernanke said he expected the central bank to start winding down its monetary stimulus efforts later this year but growth at this level is not likely to spur such a move.
The Fed expects growth to run between 2.3 and 2.6 percent this year and hit a pace of 3.5 percent next year. Still, long run GDP is still hovering between 2.3 to 2.5 percent.
The report also included data on first-quarter corporate profits, which dropped $28 billion compared with an increase of $45.4 billion in the fourth quarter.
Taxes on corporate income decreased $10.5 billion, compared with a decrease of $4.4 billion in the fourth.
Dividends decreased $103.5 billion, in contrast to an increase of $124.3 billion at the end of last year. The large fourth-quarter increase reflected accelerated and special dividends paid by corporations in anticipation of tax hikes.