The U.S. economy expanded at a 2% annualized rate in the first quarter, the Commerce Department reported Thursday, rebounding from the 43-day federal government shutdown that had slowed growth to a 0.5% crawl at the end of 2025. The recovery was powered by a snapback in federal spending and investment, which surged at a 9.3% annual rate and added 0.56 percentage points to GDP — a reversal from the fourth quarter when the shutdown subtracted 1.16 percentage points.
But the headline masked a divergence: consumer spending, the engine of the economy, slowed to 1.6% from 1.9% in the prior quarter, with both goods and services spending weakening. At the same time, business investment jumped 8.7%, likely driven by spending on artificial intelligence. A key measure of underlying demand — final sales to private domestic purchasers, which strips out volatile trade, inventory, and government components — accelerated to a 2.5% annual rate from 1.8% in the prior quarter.
The housing market remained a persistent drag. Residential investment fell at an 8% annual pace, the fifth straight quarterly decline and the steepest since the end of 2022. Excluding housing, nonresidential investment surged 10.4%, the strongest gain in nearly three years.
A surge in imports subtracted heavily from growth. Imports rose at a 21.4% annual rate, slicing 2.6 percentage points off the headline GDP figure, as U.S. demand for foreign goods outpaced exports.
“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.”
The first quarter included about a month of the U.S.-led military campaign in Iran. Iran has blocked the Strait of Hormuz, the chokepoint for a fifth of global oil and liquefied natural gas shipments, driving energy prices sharply higher. The Federal Reserve on Wednesday held its benchmark interest rate steady, explicitly citing the conflict.
Carl Weinberg, chief economist at High Frequency Economics, acknowledged that standard forecasting tools are useless in the current environment. “The truth is that we do not have any defensible basis for trying to project how these indicators will print,” Weinberg wrote. “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 release was the first of three Commerce Department estimates for the quarter; subsequent revisions could alter the picture.