WASHINGTON (Reuters) - U.S. economic growth accelerated in the first quarter, the government confirmed on Thursday, but the export and inventory boost to activity masked weakness in domestic demand, some of which appears to have prevailed in the current period.

FILE PHOTO: Federal Reserve Chairman Jerome Powell speaks speaks at "C. Peter McColough Series on International Economics: A Conversation with Jerome H. Powell" at the Council on Foreign Relations in New York, U.S., June 25, 2019. REUTERS/Brendan McDermid/File Photo

Federal Reserve Chairman Jerome Powell last week acknowledged the temporary lift to economic growth from trade and inventories, which he described as “components that are not generally reliable indicators of ongoing momentum.”

The U.S. central bank last Wednesday signaled interest rate cuts as early as July, citing rising risks to the economy, especially from an escalation in the trade conflict between the United States and China, and low inflation.

“First-quarter GDP paints a misleading picture of the U.S. economy’s vigor at the start of the year, and second-quarter GDP will come as a timely reminder that the economy is now well past its inflection point,” said Lydia Boussour, a senior U.S. economist at Oxford Economics in New York.

Gross domestic product increased at a 3.1% annualized rate, also driven by more spending on highways and defense, the Commerce Department said in its third reading of first-quarter GDP. That was unchanged from its estimate last month and in line with economists’ expectations. The economy grew at a 2.2% pace in the October-December period.

Despite the unchanged reading, growth in consumer spending was revised lower and business investment in intellectual property products was stronger than previously estimated.

There were also upward revisions to spending on nonresidential structures and government expenditure. Revisions to the trade deficit and inventory accumulation were minor.

Excluding trade, inventories and government spending, the economy grew at only a 1.3% rate in the first quarter. That was the slowest rise in this measure of domestic demand since the second quarter of 2013.

When measured from the income side, the economy grew at a tepid 1.0% rate in the last quarter. Gross domestic income (GDI) was previously reported to have increased at a rate of 1.4%. The income side of the growth ledger was curbed by a dip in profits.

After-tax profits without inventory valuation and capital consumption adjustment, which correspond to S&P 500 profits, fell at a 0.2% rate as earnings of domestic nonfinancial corporations decreased.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 2.1% rate in the January-March period, down from the 2.2% growth pace estimated last month.

Inflation was also muted in the first quarter. A gauge of inflation tracked by the Fed increased at a 1.2% rate, revised up from the previously reported 1.0% pace.

The economy will mark 10 years of expansion in July, the longest on record. But momentum is slowing, with manufacturing struggling, the trade deficit widening again and the housing sector still mired in a soft patch.

While consumer spending appears to have regained speed in the second quarter, business investment in equipment is expected to have contracted further following Wednesday’s weak report on durable goods orders in May. The trade war between Washington and Beijing is hurting both business and consumer confidence.

“Just as the expansion is set to become the longest in U.S. history, recession fears have increased,” said Scott Hoyt, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “U.S. businesses appear spooked by the president’s capricious trade policy.”

The Atlanta Fed is forecasting GDP growth to rise at a 1.9% annualized rate in the April-June quarter.

The dollar .DXY was little changed against a basket of currencies, while U.S. Treasury prices edged up. U.S. stocks were trading higher.

JOBLESS CLAIMS RISE

Though a separate report from the Labor Department on Thursday showed the number of Americans filing applications for unemployment benefits rose more than expected last week, there is still no sign of a significant pickup in layoffs as economic growth shifts into lower gear.

Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 227,000 for the week ended June 22. The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose 2,250 to 221,250 last week.

“Job creation may be slowing, but employers do not appear to be trimming their payrolls more aggressively,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

The GDP report showed the trade deficit narrowed to $905.0 billion in the first quarter, instead of $903.6 billion as reported last month. Trade contributed 0.94 percentage point to GDP rather than the 0.96 percentage point estimated last month.

The U.S.-China trade tensions have caused wild swings in the trade deficit, with exporters and importers trying to stay ahead of the tariff fight between the two economic giants.

The standoff has also had an impact on inventories. Growth in inventories was revised down to a $122.8 billion rate in the first quarter from the previously estimated $125.5 billion pace.

Part of the inventory build was because of weak demand. Inventories contributed 0.55 percentage point to first-quarter GDP, rather than the 0.60 percentage point reported last month.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down to a 0.9% rate, the weakest in a year, from the previously reported pace of 1.3%.

Business spending on equipment declined at an unrevised rate of 1.0% rate, the worst performance in three years. Government investment increased at a 2.8% rate, up from the 2.5% rate reported last month.