The United States economy demonstrated solid resilience in the first quarter of 2026, registering a gross domestic product (GDP) annualized rate of 2%, according to data released Thursday by the Commerce Department. This figure marks a sharp increase from the fourth quarter’s sluggish 0.5% growth, although it fell slightly short of the 2.3% rate projected by economists in a FactSet poll. The economic report comes as the United States and Israel engage in an ongoing conflict with Iran that has significantly impacted global markets and domestic prices.
Drivers of Economic Growth
The first-quarter expansion was fueled by several key factors, including resilient consumer spending, a substantial rise in business investment, increased exports, and government outlays returning to normal after the longest government shutdown on record. Consumer spending, which accounts for approximately two-thirds of the US economy, grew at an annualized rate of 1.6%. However, this growth was driven exclusively by services; spending on goods actually edged lower during the quarter.
When adjusted for a 4.5% increase in prices, real consumer spending declined at an adjusted rate of -2.5%. Despite this decline in real purchasing power, broader indicators showed strength. Real final sales to private domestic purchasers, often viewed as a key gauge of underlying demand, posted an annualized rate of 2.5%, up from the previous quarter’s 1.8%.
Business Investment and AI Sector
A major contributor to the economic uptick was business investment, which surged at a stunning 10.4% annualized rate in the first quarter. This represents a significant jump from the fourth quarter’s 2.4% growth and marks the highest expansion rate since mid-2023. Economists attribute this increase primarily to investments in equipment and software related to artificial intelligence (AI).
"This is still an AI-driven economy," noted Olu Sonola, head of US economics at Fitch Ratings. While investment in other areas remains weak, the continued build-out of AI infrastructure provides a support structure for business spending. Most companies have also reported robust first-quarter earnings, helping to stabilize market sentiment despite initial volatility.
Impact of Middle East Conflict on Inflation
The ongoing war with Iran has introduced significant economic headwinds, particularly through energy costs. Global oil prices remain firmly above $100 a gallon, keeping US gas prices elevated and prompting the Federal Reserve to delay further interest rate cuts. The conflict is now in its ninth week, raising concerns about long-term economic stability.
Chris Zaccarelli, chief investment officer at Northlight Asset Management, noted that while higher stock prices are possible as long as earnings grow, prolonged conflict could trigger investor nervousness. "The longer the war drags on, the more damage it will inflict on the US economy," said Sonola of Fitch Ratings, warning that persistent high oil prices risk pushing inflation up and dampening overall growth.
