Economic Update: U.S. Growth in Q1
According to the latest estimates from the Commerce Department, U.S. economic growth has made a recovery in the first quarter, bouncing back from a decline in the fourth quarter.
The U.S. Bureau of Economic Analysis (BEA) reported that the economy expanded at an annualized rate of 2% over the first three months of the year—this figure ended up being below the expectations from economists, who had predicted a growth rate of 2.3%.
It’s worth noting that the economy grew by approximately 2.1% in 2025. Interestingly, the growth rate was significantly higher at 4.4% in the third quarter of the previous year, dropping to just 0.5% in the fourth quarter.
The inflation measure favored by the Fed continues its upward trend as of March.
The BEA identified several key contributors to GDP growth in the first quarter, namely investment, exports, personal consumption, and government spending. Notably, imports also rose during this period.
A significant portion of investment was directed towards equipment, particularly computers and related technologies. In addition, there was investment in artificial intelligence and intellectual property products, including software and inventory for retailers and wholesalers. However, investments in residential and non-residential buildings saw a decrease, partially countering the overall rise.
Gas prices are hitting new highs amid ongoing tensions with Iran.
Government spending saw an increase, largely due to heightened compensation for federal employees following the end of a government shutdown last quarter, although there were reduced compensations for unpaid federal workers.
Personal consumption predominantly increased in services like healthcare, which covers hospital, nursing home, and outpatient services.
The real final sales to domestic private buyers rose by 2.5% in the first quarter, after a 1.8% increase in the fourth quarter.
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Michael Pearce, chief U.S. economist at Oxford Economics, commented that the economy’s core remained robust in the first quarter, with advancements in AI and tax reductions beginning to make an impact. These factors are expected to continue driving growth throughout the year; however, rising energy prices may dampen what would otherwise be a strong economic outlook.
He also mentioned that consumer spending in March was, in part, a response to the harsh weather earlier in the year. While fiscal stimulus has been more of a burden on the economy lately, increasing energy prices will alter this balance in the forthcoming months.
Gregory Daco, chief economist at EY Parthenon, added that investment in AI data centers has been a significant factor in boosting GDP. Though there are potential long-term benefits from AI investment enhancing productivity, the immediate impacts—such as heightened capital spending and energy demand—are likely to exert additional inflationary pressures.
Daco elaborated that private sector demand exhibited stronger momentum than in the final quarter of 2025, showcasing a delicate balance among affluent consumers, AI investments, and economic growth. While headline gains appear favorable, they conceal vulnerabilities within the underlying economic framework.
