The US economy expanded at a slower-than-expected 3.1 per cent rate in the first quarter, its weakest performance in two years and below what most analysts consider its long-term potential.

The figures dealt a further blow to hopes that business investment would support strong growth as consumers started to rein in their spending.

They also present a challenge to the Federal Reserve, which has dismissed recent evidence of more sluggish growth, saying it remains concerned chiefly with heading off a rise in inflation.

Overall business investment - on buildings, equipment and software - slowed to a 4.7 per cent growth rate from 14.5 per cent at the end of last year.

The bloated US trade deficit also stunted growth.

Without this drag, the economy would have grown at about 4.6 per cent annualised, rather than 3.1 per cent.

The Fed meets next week and is widely expected to raise rates by 25 basis points to 3 per cent.

"It is the mix of growth that is the biggest disappointment here," said Paul Ashworth, an analyst at consultancy firm Capital Economics.

"If business investment is slowing, there is nothing to pick up the slack as consumer spending weakens."

The large rise in inventories during the quarter suggested that some companies might have been caught off guard by weaker demand, he said.

If businesses find themselves holding excess inventories, orders and production may tail off in the second quarter of the year.

At the start of the month, many economists were expecting growth to surpass 4 per cent in the first quarter.

But evidence has since been mounting that the US is entering a soft patch and that sluggish growth in the rest of the world has been holding back US exports.

The traditional drivers of the US economy held up reasonably well in the first quarter. Consumer spending slowed only slightly to 3.5 per cent, annualised from 4.2 per cent in the fourth quarter.

The biggest disappointment came in business spending on equipment and software - investment excluding outlays on buildings - which grew at an annualised rate of just 6.9 per cent, compared with 18.4 per cent in the previous quarter.

The disappointment on growth was compounded by slightly higher inflation figures.

The core personal consumption expenditure deflator - the Fed's favourite measure of inflation - accelerated to an annualised 2.2 per cent in the first quarter from 1.7 per cent.