The U.S. economy expanded at an annual rate of 2% in the first three months of 2026, slower than forecasters expected but a rebound from weak growth in the previous quarter, new government data shows.
Economists polled by FactSet had projected the nation’s gross domestic product — the total value of goods and services produced in the U.S. — to rise at an annualized rate of 2.2% for the January to March quarter.
“The core of the economy remained solid in Q1, driven by the AI buildout and the tax cuts beginning to feed through,” Michael Pearce, chief U.S. economist with Oxford Economics, said in a note to investors. “Those factors will continue to drive growth over the rest of the year, but the jump in energy prices will take some of the shine off what would otherwise have been a strong year for the economy.”
The latest GDP reading marks a reversal from the fourth quarter of last year, when the economy grew at a meager 0.5% pace after being slammed by a government shutdown.
Business investment driven largely by the AI boom rose 8.7% on an annual basis, the Commerce Department reported on Thursday. At the same time, consumer spending — which drives nearly two-thirds of economic activity in the U.S. — slowed slightly from last quarter, falling from 1.9% at the end of 2025 to 1.6%. Recent Bank of America data shows most of the growth in March was driven by higher-income households.
While the economy has remained resilient, the Iran war is clouding the outlook. The war has sent energy prices skyrocketing due to a slowdown of traffic in the Strait of Hormuz, a critical chokepoint for global oil supply. On Thursday, the average cost for a gallon of gasoline hit $4.30, the highest level since July 2022, while Brent crude, the international benchmark, topped $126, a wartime high.
In a forecast last week, EY-Parthenon chief economist Gregory Daco projected the war could drag GDP down by 0.3 percentage points this year. He estimates GDP will grow by 1.8% for the entire year, which would be a slowdown from 2025, when GDP increased 2.1% on an annual basis, according to the Commerce Department.
Another economic indicator, the Personal Consumption Expenditures Price Index, was also released Thursday, showing inflation increased at a 3.2% annual rate, above the Federal Reserve’s target of 2%.
