US economy grew 2% despite Iran war — but Americans' spending slowed

• Federal government spending surged 9.3% annually in Q1, adding over half a percentage point to growth after subtracting 1.16 points in Q4 2025 during the shutdown
• Consumer spending, representing 70% of economic activity, decelerated to 1.6% growth from 1.9% in the prior quarter, with spending on goods falling slightly
• Business investment rose 8.7% driven by AI spending, while residential investment fell 8% for the fifth consecutive quarter; imports surged 21.4%, subtracting 2.6 percentage points from GDP growth

US Q1 2026 GDP Summary

Key Economic Data:

The US economy grew 2.0% in Q1 2026 (January-March), rebounding from a weak 0.5% expansion in Q4 2025, according to the Commerce Department's initial estimate released Thursday. The recovery followed a 43-day federal government shutdown last fall.

Sector Performance:

• Government spending: Surged 9.3% annually, contributing over 0.5 percentage points to growth after subtracting 1.16 points in Q4 2025
• Consumer spending: Slowed to 1.6% from 1.9% in Q4, despite representing 70% of economic activity. Goods spending fell slightly
• Business investment: Rose 8.7%, likely driven by AI-related expenditures. Nonresidential investment (excluding housing) jumped 10.4%, the largest increase in nearly three years
• Residential investment: Declined 8% annually—the fifth consecutive quarterly drop and steepest since late 2022
• Imports: Surged 21.4%, subtracting 2.6 percentage points from growth

Market Implications:

Heather Long of Navy Federal Credit Union described a "split-screen economy" where AI-focused companies thrive while middle-income households struggle with high gas prices and bill management. Core economic strength indicators grew 2.5%, up from 1.8% in Q4.

Geopolitical Impact:

The Iran conflict, which included a blockade of the Strait of Hormuz (through which 20% of global oil and LNG flows), has elevated energy prices and inflation. The Federal Reserve cited "high uncertainty" from the conflict when maintaining rates Wednesday. Economist Carl Weinberg noted the situation is unprecedented and difficult to model.

The report reflects significant economic uncertainty ahead.