Washington has been tightening its belt for several years but ramped up austerity measures in 2013, hiking taxes in January and slashing the federal budget in March.
Still, economic growth has been surprisingly resilient, supported by the Federal Reserve's low interest rate policies. Most economists expect growth will slow mid-year as budget cuts come into effect.
Government spending fell even more sharply in the fourth quarter, and economists speculate that government agencies pulled back in anticipation of budget cuts initially due to begin in January but which took effect in March.
In the first quarter, government spending dropped at a 4.9 percent annual rate, faster than the 4.1 percent rate initially estimated. Spending fell at federal, state and local government offices, though the majority of the downward revision in Thursday' report came at the county and city level.
The drag from government and inventories was partially offset by an upward revision to consumer spending, which rose at a 3.4 percent annual rate, up two tenths of a point from the government's previous estimate.
However, a cloud hung over that category, as most of the upward revision was due to higher sales of gasoline. Higher prices at the pump are a burden on consumers, leaving them less money to spend on other things. Consumer spending accounts for more than two-thirds of U.S. economic activity.
(Read More: Sales of Bank-Owned Homes Plunge to a 5-Year Low)
After-tax corporate profits fell at a 1.9 percent annual rate in the quarter, the first decline in a year.
Total imports grew at a slower pace in the first quarter than initially estimated, moderating the drag on growth from net trade.
Excluding the volatile inventories component, GDP rose at an upwardly revised 1.8 percent rate, slightly higher than analysts had forecast.
(See the full GDP release here.)
Jobless Claims Rise
Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 354,000, the Labor Department said on Thursday. Claims for the prior week were revised to show 4,000 more applications received than previously reported.
Economists polled by Reuters had expected first-time applications to hold steady at 340,000 last week.
A Labor Department analyst said claims for five states, including Virginia, Minnesota and Oregon, were estimated since state offices had less time to prepare data because of the national holiday on Monday.
This could have the distorted the readings, making last week's claims a less useful gauge of labor market trends.
The four-week moving average for new claims, which irons out week-to-week volatility, edged up 6,750 to 347,250.
Despite the rise last week, claims remained in the middle of their range for this year and below levels economists normally associate with modest job gains.
(Read More: Rising Mortgage Rates, Home Prices a Lethal Brew)
There is still no sign of layoffs related to belt-tightening in Washington, particularly the $85 billion in across-the-board government spending cuts which has slowed factory production.
Steady improvement in labor market conditions and rising house prices are helping to sustain consumer spending, limiting the impact of the drag from fiscal policy on the economy.
The economy's unexpected show of resilience has fueled speculation the Federal Reserve could start scaling back its monetary stimulus by the end of the year, pushing up government bond yields.
Fed Chairman Ben Bernanke said last week a decision to start tapering the $85 billion in bonds the U.S. central bank is buying each month could come at one of its "next few meetings" if the economy appeared set to maintain momentum.
The claims report showed the number of people still receiving benefits under regular state programs after an initial week of aid rose 63,000 to 2.99 million in the week ended May 18. The so-called continuing claims covered the week of the government's household employment survey from which the unemployment rate is calculated.
Continuing claims have dropped 21,000 between the April and May household survey week, which could see the jobless rate holding at an almost 4-1/2 year low of 7.5 percent.
(See the full jobless claims release here.)