U.S. economy grew 2% in the first quarter, helped by AI boom and reversal of shutdown effects
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The U.S. economy expanded at a 2% annualized pace in the first quarter of 2026, the Commerce Department said Thursday.
Why it matters: The economy was on relatively solid footing as the Iran war began, amid a rebound from the government shutdown and strong AI investment.
By the numbers: The economy expanded by just 0.5% at the end of 2025, a significant slowdown from the prior quarter's 4.4% growth rate as the shutdown weighed on GDP.
The intrigue: Even stripping out the effects from the shutdown-related rebound, underlying growth appeared robust.
- Real final sales to private domestic purchasers — a measure of private-sector spending that excludes government spending, trade and inventory swings — rose at a 2.5% annual rate, picking up from the 1.8% pace in the final three months of 2025.
Zoom in: The AI boom showed little sign of abating.
- Investment in information processing equipment contributed 0.8 percentage point to growth in the first quarter, while software investment accounted for nearly 0.6 percentage point.
- Consumer spending cooled in the first quarter, growing at a 1.6% annualized rate last quarter, down from about 2% at the end of last year.
Of note: Separate data released by the Commerce Department on Thursday showed inflation soared in March on the back of the war-related energy shock.
- The Personal Consumption Expenditures Price Index rose 0.7% in March. From the same month a year ago, the PCE Price Index rose 3.5%, up from 2.8% in February.
- The increase was more muted once energy and food costs were stripped out: Core PCE rose 0.3% in March, cooling from the previous month. It increased 3.2% on a year-over-year basis, up from February's 3% pace.
The big picture: The data comes as Federal Reserve officials signal heightened concern about the nation's inflation situation as a war-related energy shock ripples through the economy, while other economic indicators hold up.
- The Fed kept interest rates steady on Wednesday, though the decision was the most contentious in decades.
- Three Fed presidents dissented, preferring to signal equal readiness to raise or lower rates — a shift from a long-standing bias toward cuts.
What they're saying: Fed chair Jerome Powell told reporters on Wednesday that the economy has been "quite resilient."
- "Some of that is that consumer spending is hanging in pretty well ... and some of it is just the apparently insatiable demand for data centers all over the United States," Powell said.
Editor's note: This story has been updated to include a chart.
