GDP Grows 2% in Q1 Amid Middle East Conflict
- Economy grew at an annualized rate of 2% in the first quarter of 2026, according to data released Thursday by the Commerce Department.
- The growth rate was driven by a surge in federal government spending and investment, which increased at a 9.3% annual rate, contributing more than half a percentage point...
- However, consumer spending, which accounts for approximately 70% of U.S.
The U.S. Economy grew at an annualized rate of 2% in the first quarter of 2026, according to data released Thursday by the Commerce Department. This rebound from a 0.5% expansion in the final three months of 2025 occurred despite growing economic uncertainty stemming from the ongoing conflict in the Middle East and a 43-day federal government shutdown last year.
The growth rate was driven by a surge in federal government spending and investment, which increased at a 9.3% annual rate, contributing more than half a percentage point to overall growth. This increase offset a 1.16 percentage point subtraction in the fourth quarter of 2025. Business investment also played a significant role, rising at an 8.7% rate, fueled by spending related to artificial intelligence.
However, consumer spending, which accounts for approximately 70% of U.S. Economic activity, slowed to a 1.6% pace in the first quarter, down from 1.9% in the previous quarter. Residential investment continued to be a drag on the economy, falling at an 8% annual rate for the fifth consecutive quarter.
Iran Conflict Impacts Energy Prices
The economic outlook remains clouded by the conflict in Iran, which has led to disruptions in the Strait of Hormuz, a critical shipping route for oil and liquefied natural gas. The closure of this waterway has pushed energy prices higher, contributing to inflationary pressures and impacting consumer spending. Approximately one-fifth of the world’s oil and liquefied natural gas passes through the Strait of Hormuz.
Federal Reserve Chair Jerome Powell described the economy as “quite resilient” in the face of the energy shock, noting “growth is really solid across our economy.” He also highlighted the “apparently insatiable demand for data centers all over the United States” as a contributing factor to economic strength.
Federal Reserve Holds Rates Steady
Despite the economic growth and inflationary pressures, the Federal Reserve maintained its benchmark interest rate at 3.50%–3.75% during its recent meeting. The central bank cited “a high level of uncertainty” arising from the Iran conflict as a key factor in its decision.
The report covering the first quarter includes roughly one month of fighting in Iran, making accurate economic forecasting particularly challenging. Carl Weinberg, chief economist at High Frequency Economics, noted the difficulty in projecting economic indicators given the scale of uncertainty.
“The truth is that we do not have any defensible basis for trying to project how these indicators will print,”
Carl Weinberg, High Frequency Economics
Weinberg further commented on the impact of the conflict, stating,
“President Donald Trump’s war with Iran has led to a total blockade of the Strait of Hormuz….”
Carl Weinberg, High Frequency Economics
Imports increased by 21.4%, reducing first-quarter growth by more than 2.6 percentage points. The rebound in GDP growth suggests some resilience in the U.S. Economy, but the ongoing geopolitical tensions and their impact on energy prices pose significant risks to the outlook.