The U.S. economy grew at an annualized rate of 2% during the first quarter of 2026, recovering from a paltry 0.5% expansion at the end of 2025 and the lingering effects of a 43-day federal government shutdown, according to Commerce Department data. The rebound was partly powered by a jump in federal spending, yet the broader outlook is clouded by rising energy costs and the U.S. military engagement in Iran.
Federal spending alone contributed more than half a percentage point to growth after having lopped off 1.16 points in the previous quarter. Spending by consumers, which accounts for 70% of economic activity, decelerated from 1.9% to 1.6%, with outlays on goods and services softening.
“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.”
Underlining that divide, business investment rose at an 8.7% annual pace, buoyed by heavy spending on artificial intelligence. Excluding residential structures, non-residential investment jumped 10.4%, the biggest gain in nearly three years. Residential investment, however, tumbled 8%, the fifth straight quarterly decline and the largest drop since the end of 2022.
The report also revealed that imports surged 21.4%, which subtracted more than 2.6 percentage points from output. An alternative measure that the Commerce Department also tracks — capturing underlying demand by stripping out inventories, trade, and government spending — grew at a solid 2.5% pace, up from 1.8% in the prior quarter.
Economists warned that the conflict in Iran, which has blockaded the Strait of Hormuz — the conduit for roughly one-fifth of global oil and liquefied natural gas — means the usual forecasting models have broken down.
Carl Weinberg, chief economist at High Frequency Economics, said he did not attempt to project first-quarter GDP because of the unprecedented disruption. “Trump’s war with Iran has led to a total blockade of the Strait,” Weinberg wrote. “We do not know how to model the impact of that event, as we have never seen anything quite like it.”
The Federal Reserve earlier in the week cited “a high level of uncertainty” tied to the Iran war as a key reason for holding its benchmark interest rate steady.