US economy rebounds in Q1 but Iran war clouds outlook, spending

The U.S. economy regained some momentum at the start of 2026, expanding at a modest 2% pace from January through March after recovering from last fall’s 43-day federal government shutdown. But the outlook appears to be clouded by the Iran war.

The Commerce Department reported Thursday that gross domestic product (GDP), the nation’s output of goods and services, rebounded from a lackluster 0.5% expansion the last three months of 2025.

The federal government’s spending and investment grew at a 9.3% annual rate in the first quarter, adding more than half a percentage point to growth after lopping off 1.16 percentage points in fourth-quarter 2025.

Growth in consumer spending, which accounts for 70% of U.S. economic activity, slowed to 1.6% in the first quarter from 1.9% at the end of 2025. Spending on goods, including food and clothing, fell slightly. Spending on services slowed.

But business investment, likely driven by spending in artificial intelligence, rose at an 8.7% pace.

A weak housing market continues to weigh on the economy. Residential investment fell at an 8% annual pace – the fifth straight quarterly drop and the biggest since the end of 2022.

Excluding housing, nonresidential investment surged 10.4%, the biggest jump in nearly three years.

An uptick in imports, which rose at an annual rate of 21.4% from January-March, slashed more than 2.6 percentage points off first-quarter growth.

“This is a split-screen economy,” Heather Long, chief economist at the Navy Federal Credit Union, wrote.

“Companies and investors involved in AI are on fire. Meanwhile, middle and moderate-income households are struggling with high gas prices … Consumption is slowing as people are struggling to manage all their bills and growing more concerned about the future.”

Still, a category within the GDP data that measures the economy’s underlying strength grew at a solid 2.5% clip, accelerating from 1.8% in the fourth quarter of 2025. This category includes consumer spending and private investment, but excludes volatile items like exports, inventories and government spending.

The first quarter included about a month of the clash in Iran. Iran has blocked the Strait of Hormuz through which a fifth of the world’s oil and liquefied natural gas passes. That has driven energy prices higher, fueling inflation and hurting consumers. The Federal Reserve, announcing Wednesday that it was keeping its benchmark interest unchanged, cited “a high level of uncertainty″ arising from the conflict.

Carl Weinberg, chief economist at High Frequency Economics, did not even bother to forecast first-quarter GDP growth.

“The truth is that we do not have any defensible basis for trying to project how these indicators will print,” Weinberg wrote in a commentary Monday.

“President Donald Trump’s war with Iran has led to a total blockade of the Strait of Hormuz. We do not know how to model the impact of that event, as we have never seen anything quite like it.″

Thursday’s report was the first of three Commerce Department estimates.

DAILYSABAH