US economic growth accelerated at the start of the year, fueled by a massive upswing in business investment and solid consumer demand.
Inflation-adjusted gross domestic product increased an annualized 2% in the first quarter after the longest-ever federal government shutdown limited growth in the closing months of 2025, according to an initial estimate issued Thursday by the Bureau of Economic Analysis.
Consumer spending, which comprises about two-thirds of economic activity, increased at a better-than-expected 1.6% rate, driven by demand for services including healthcare and financial services. Business outlays on equipment and structures advanced 10.4%, the fastest pace in almost three years and supported by rapid investment in artificial intelligence.
The report points to an economy that has so far held firm and is better positioned to withstand the fallout from the Middle East conflict, which is pushing oil prices sharply higher and disrupting global supply chains. Still, the geopolitical situation risks tempering growth should inflation-weary consumers become more guarded.
While higher tax refunds helped to underpin household spending, the GDP report showed inflationary pressures accelerated sharply in March as the war spurred a surge in gasoline prices.
The Federal Reserve’s preferred measure of inflation — the personal consumption expenditures price index — rose 0.7% last month, the most since 2022. The gauge was up 3.5% from the prior year, according to separate BEA data. Gas prices have since continued to climb and are now at the highest since 2022.
Fed officials on Wednesday left interest rates unchanged, but revealed a deepening division over the policy outlook amid increased uncertainty caused by the Iran war.
While household demand cooled from the prior quarter, some of that may have reflected the severe winter weather in much of the US at the start of the year. Inflation-adjusted spending rose 0.2% in March from a month earlier as consumers doled out for goods like cars and household furnishings.
Separate data Thursday showed applications for US unemployment benefits plunged to the lowest level since the late 1960s last week, a sign that layoffs remain limited across the economy.
AI Push
Fed Chair Jerome Powell described the economy as “quite resilient” in his final press conference as chair Wednesday, in part due to “apparently insatiable demand” for data centers across the US. Big tech companies Alphabet Inc., Amazon.com Inc., Meta Platforms Inc. and Microsoft Corp. are expecting to plow hundreds of billions into AI this year.
The first-quarter jump in business spending was powered by outsized increases in information processing equipment and software. Meanwhile, government spending rebounded 4.4% in the first quarter after the government shutdown disrupted services and pay during the previous period.
Net exports, however, weighed notably on growth, subtracting 1.3 percentage points from the calculation of GDP in the first quarter, the most in a year. That was due to a surge in imports that likely reflected a rush by businesses to get goods into the country after the Supreme Court struck down many of President Donald Trump’s tariffs in February.
Because swings in trade and inventories often distort GDP, economists pay close attention to a narrower metric of underlying demand known as final sales to private domestic purchasers. This measure rose at a 2.5% pace in the first quarter, a pickup from the prior quarter.
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