WASHINGTON, May 28 (Reuters) - U.S. economic growth was not a strong as initially thought in the first quarter, and momentum is set to slow this quarter, with the war with Iran stoking inflation and squeezing households finances.

Gross domestic product increased at a 1.6% annualized rate last quarter, the Commerce Department's Bureau of Economic Analysis said in its second estimate of first-quarter GDP on Thursday. Growth was previously reported to have advanced at a 2.0% pace. Economists polled by Reuters had expected that GDP growth would be unrevised at a 2.0% rate.

The economy grew at a 0.5% pace in the fourth quarter. The downgrade to the first-quarter GDP estimate reflected downward revisions to inventory investment and consumer spending.

Overall economic activity is mostly being driven by artificial intelligence-related spending.

Growth in consumer spending, which accounts for more than two-thirds of the economy, was revised down to a 1.4% rate from the previously reported 1.6% pace. Hefty tax refunds provided some cushion to households from soaring gasoline prices.

Business spending on equipment increased at an unrevised 17.2% growth pace. Final sales to private domestic purchasers, which exclude government, trade and inventories, rose at a 2.4% pace. That as a slight downgrade from the previously estimated 2.5% growth rate.

Profits from current production rose at a $40.4 billion rate in the first quarter, a sharp slowdown from the $246.9 billion growth pace in the fourth quarter.

When measured from the income side, the economy grew at a 0.9% rate in the January-March quarter. Gross domestic income increased at a 1.6% pace in the fourth quarter.

The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, grew at a 1.3% rate. Gross domestic output grew at a 1.1% rate in the October-December quarter.

Economists expect the conflict in the Middle East to weigh on economic growth from the second quarter.