WASHINGTON (Reuters) - The U.S. economy slowed more than previously estimated in the first quarter amid the weakest consumer spending in nearly five years, but growth appears to have since regained momentum on the back of a robust labor market and tax cuts.

FILE PHOTO: Customers push their shopping carts after making their purchases at Target in Chicago, Illinois, U.S. November 23, 2017. REUTERS/Kamil Krzaczynski/File Photo

Gross domestic product increased at a 2.0 percent annual rate in the January-March period, the Commerce Department said on Thursday in its third estimate of first-quarter GDP, instead of the 2.2 percent pace it reported last month.

The economy grew at a 2.9 percent rate in the fourth quarter. The downgrade to first-quarter growth reflected weaker consumer spending and a smaller inventory build than the government had estimated last month.

A $1.5 trillion income tax cut package, which came into effect in January, is expected to spur faster economic growth in the second quarter, putting annual GDP growth on track to achieve the Trump administration’s 3 percent target.

Economists, however, caution that the administration’s “America First” policies, which have heightened fears of trade wars, are casting a pall over the economy’s prospects.

The United States is engaged in tit-for-tat trade tariffs with its major trade partners, including China, Canada, Mexico and the European Union. Analysts fear the tariffs could disrupt supply chains, undercut business investment and potentially wipe out the fiscal stimulus.

“Trade is a significant downside risk,” said Gus Faucher, chief economist at PNC Financial Services in Pittsburgh. “The potential of a trade war that threatens the global economic expansion could lead to weaker U.S. economic growth.”

Estimates of second-quarter growth are as high as a 5.3 percent rate. Economists had expected first-quarter GDP growth would be unrevised at a 2.2 percent pace.

The moderate first-quarter growth is probably not a true reflection of the economy’s health as GDP tends to be weak at the start of the year because of a seasonal quirk.

An alternative measure of economic growth, gross domestic income (GDI), increased at a brisk 3.6 percent rate in the January-March period. That was revised up from the 2.8 percent pace reported last month.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 2.8 percent rate in the first quarter, instead of the 2.5 percent pace estimated in May.

The income side of the growth ledger was boosted by after-tax corporate profits, which surged at an 8.7 percent rate last quarter rather than the 5.9 percent pace reported in May. The government slashed the corporate tax rate to 21 percent from 35 percent effective in January. After-tax profits rose at a 1.7 percent pace in the fourth quarter.

The dollar fell against a basket of currencies while prices of U.S. Treasuries dipped. Stocks on Wall Street were largely unchanged.

CONSUMER SPENDING SLOWDOWN

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, braked to a 0.9 percent rate in the first quarter instead of the previously reported 1.0 percent pace. It was the slowest pace since the second quarter of 2013 and reflected downward revisions to healthcare spending by nonprofits and outlays on finance and insurance services.

Consumer spending grew at a 4.0 percent rate in the fourth quarter. Retail sales reports have suggested consumer spending was accelerating in the second quarter. Spending is being supported by a tightening labor market, which is gradually boosting wage growth.

A separate report from the Labor Department on Thursday showed new applications for state unemployment benefits rose 9,000 to a seasonally adjusted 227,000 for the week ended June 23, a level that remains consistent with a robust job market.

The unemployment rate is at an 18-year low of 3.8 percent, close to the Federal Reserve’s forecast of 3.6 percent by the end of this year.

“Claims remain low and the data continue to signal more than enough strength in employment growth to keep the unemployment rate trending down,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in White Plains, New York.

Weak domestic demand in the first quarter likely made businesses cautious about stocking warehouses. Businesses accumulated inventories at a rate of $13.9 billion instead of the $20.2 billion pace estimated last month. As a result, inventory investment was neutral to first-quarter GDP growth instead of adding 0.13 percentage point as reported last month.

Data so far suggest that inventories could be a small drag on second-quarter GDP growth.

While the trade deficit in the first three months of the year was a bit bigger than initially thought, it had little impact on growth. Trade is expected to contribute to GDP growth in the second quarter after data on Wednesday showed a sharp drop in the goods trade deficit in May.

Growth in business spending on equipment was revised up to a 5.8 percent rate in the first quarter from the 5.5 percent pace estimated last month. Spending on equipment has slowed following double-digit growth in the second half of 2017.

The trend is likely to persist in the second quarter as the government on Wednesday reported an unexpected drop in both orders and shipments of non-defense capital goods excluding aircraft in May.

The moderation in business spending on equipment could undercut the Trump’s administration’s argument that lower corporate tax rates would boost investment. Some companies like Apple Inc have used their tax windfall for share buybacks and dividends.