According to the Bureau of Economic Analysis’s second estimate, the U.S. economy expanded by 1.6% quarter-on-quarter (q/q, annualized) in the first quarter – a bit lower than 2.0% reported in the advance estimate. The downgrade was largely due to a weaker pace of consumer spending and inventory investment.
- Major contributors to Q1 growth included investment, exports, consumer spending, and government outlays, which were partially offset by a sharp rise in imports.
Consumer spending rose by 1.4% q/q (previously reported at 1.6%), a modest deceleration from Q4’s 1.9%. Goods spending was largely flat on the quarter, while services rose by a respectable 1.8% (previously 2.4%).
Business investment grew by 10.1% q/q, led by a sharp acceleration in equipment spending (+17.2%) and another solid gain in intellectual property products (+11.6%). Meanwhile, spending on structures (-5.4%) declined for the nineth consecutive quarter. Residential investment (-6.3%) also fell sharply, amid a further softening in home sales and little growth in construction activity.
Government spending (+4.4%) rebounded following a sharp drop in Q4 due to the 43-day government shutdown.
International trade shaved 1.3 percentage points (pp) from growth, as a surge in imports (+21.1%) was only partly offset by a solid gain in exports (13.1%). Most of the gain in imports was driven by a pick-up in goods. Inventory investment added a modest 0.1pp (down from the advanced estimate’s 0.4pp contribution) to Q1 GDP.
Final sales to private domestic purchasers, a better gauge of underlying demand as it includes only household consumption and fixed investment rose by a healthy 2.4%, an acceleration from Q4’s gain of 1.8%.
Real Gross Domestic Income (GDI) – an alternative measure of economic output – rose 0.9% after rising a similar 1.6% in Q4-2025. Corporate profits were up a modest 3.8% (annualized) or $40.4 billion (unannualized) after accounting for inventory valuation and capital consumption adjustments. Personal income was up 3.3%, led by decent growth in employee compensation (+3.2%) and personal income receipts on assets (+3.9%).
Key Implications
The second estimate of Q1 real GDP did little to change the underlying narrative. The U.S. economy remained resilient through the first three-months of the year, with growth improving after a sluggish end to 2025. In part, the uptick was driven by a rebound from Q4’s sharp decline in federal outlays, stemming from the record-long government shutdown. Business investment remained a bright spot, with gains driven by further investments in AI and some broadening in capital expenditures to non-AI driven expenditures.
Consumer spending was a soft spot in Q1 (as evidenced by the further downgrade in this morning’s second estimate), though that appears to be largely related to a series of weather-related events that caused widespread disruptions from the Northeast down to the South through late-January and early-February. Spending has since rebounded and has (so far) remained reasonably resilient through the first few months of the energy shock, in part due to higher tax refunds which have provided households some cushion to absorb the jump in energy costs. We see the economy expanding around a 2% pace in Q2, aided by continued investments in AI and moderate growth in consumer spending.
