The U.S. economy expanded by 2.0% quarter-on-quarter (q/q, annualized) in the first quarter – a touch weaker than the consensus forecast of 2.3% – and an acceleration from Q4-2025’s 0.5%. Major contributors to last quarter’s growth included investment, exports, consumer spending, and government outlays. Imports were a meaningful drag.
Consumer spending rose by 1.6% q/q, or a similar pace to Q4’s1.9%. Goods spending was flat on the quarter, while services rose by a healthy 2.4%.
Business investment grew by 10.4% q/q, led by a sharp acceleration in equipment spending (+17.2%) and another solid gain in intellectual property products (+13.0%). Meanwhile, spending on structures (-6.7% q/q) declined for the nineth consecutive quarter. Residential investment (-8.0%) also declined sharply, amid a further softening in home sales and little growth in construction activity.
Government spending (+4.4%) rebounded following a sharp decline in Q4 due to the 43-day government shutdown.
International trade shaved 1.3 percentage points (pp) from growth, as surge in imports (+21.4%) was only partly offset by a solid gain in exports (12.9%). Most of the gain in imports was driven by a pick-up in goods, though services were also higher. Inventory investment added a modest 0.4 percentage points 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 2.5%, an acceleration from Q4’s gain of 1.8%.
Core PCE inflation rose 4.3% q/q annualized, up sharpy from Q4’s 2.7% – marking the fastest quarterly gain since Q1-2023.
Key Implications
The U.S. economy remained resilient though the first three-months of the year, with growth rebounding 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 more traditional areas of investment.
Consumer spending was a soft spot in Q1. While some of the weakness can be chalked up to weather related effects, the March figures (also released this morning) also came in a bit softer than expected, suggesting the recent jump in gasoline prices is already having some impact on spending patterns. Higher tax refunds should offer some near-term cushion for households, which alongside continued investments in AI, is likely to keep the economy expanding at around a 2% pace in Q2.
