Ready for a little good news? A moment of bright cheer in a sea of midterm blues, pun definitely intended? The Bureau of Economic Analysis reports this morning that the US economy grew in real terms at an annualized rate of 2.0% in the first quarter, despite the war with Iran, which occupied the final month and drove a rapid rise in fuel prices. Furthermore, the structure of this growth portends even better results ahead:
Real gross domestic product (GDP) increased at an annual rate of 2.0 percent in the first quarter of 2026 (January, February, and March), according to the advance estimate released today by the U.S. Bureau of Economic Analysis. In the fourth quarter of 2025, real GDP increased 0.5 percent.
The contributors to the increase in real GDP in the first quarter were investment, exports, consumer spending, and government spending. Imports, which are a subtraction in the calculation of GDP, also increased. ...
Real final sales to private domestic purchasers, the sum of consumer spending and gross private fixed investment, increased 2.5 percent in the first quarter, compared with an increase of 1.8 percent in the fourth quarter.
The internals on this report seem decent enough, if a bit subdued. It's certainly a significant improvement over Q4's 0.5% growth rate, a little surprising given the usual dip in first quarters. Consumer spending increased at an almost identical rate from Q4 (1.6% compared to 1.9%), with almost all of the increase in services. The last month of price increases pushed the price inflation index to 3.2%, as expected, which undoubtedly chilled consumer activity through the last third of the quarter.
The bigger news comes from business investment. Despite the crisis in the Persian Gulf and the rapid rise of oil prices, investors became very bullish in Q1. Gross private domestic investment rose by 8.7%, with big gains in nearly every category except residential, which came in at -8.0%, a fifth straight quarter of decline. That may become a problem for Trump's "affordability" messaging in the midterms as housing costs continue to rise. Otherwise, it appears that investors are ready to push forward on long-term bets on growth.
The overall number looks even more impressive when considering the trade imbalance in Q1. Exports rose 12.9%, but imports rose more sharply at 21.4%, cutting deeply into the final GDP number. Growth in goods far outstripped services in both categories. That imbalance may be hiding a better quarter than imagined. In Table 1.4.1, the BEA estimates that overall gross domestic purchases rose 3.2% when excluding exports and imports, and final sales to domestic purchasers rose 2.8% in Q1.
The Wall Street Journal notes that the boost comes in part as a recovery from the shutdown in the previous quarter:
A measure of underlying demand in the economy strengthened thanks to the strong business investment, and despite uncertainties around the war in Iran and the Trump administration’s tariff policies.
Final sales to private domestic purchasers rose at a 2.5% rate in the first quarter, picking up from 1.8% in the prior quarter. The measure carves out the more volatile government, inventory and international trade data.
Spending by the federal government rose at a 9.3% rate, picking up strongly from a 16.6% contraction in the prior quarter. The fourth-quarter drag was due to the record-long government shutdown, which ended in November.
That's a fair point, but a wash also. Democrats made a big deal about the low Q4 number; the White House will make some hay off of the Q1 number now. Given that the war covered slightly more than a third of this report – and that Democrats have kept DHS shut down throughout most of the quarter – expect the Trump administration to make their economic case even more sharply.
As always, let's check in with Rick Santelli at CNBC to see his extemporaneous reaction to the numbers today. Santelli is particularly happy to see a significant drop in weekly jobless claims, which is not a terribly reliable indicator, but the sharp drop may be meaningful. It's good news, perhaps not spectacular, but still strong enough for a stay-the-course argument on both the economy and the war.
Editor’s Note: Thanks to President Trump’s leadership and bold policies, America’s economy is back on track.
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