WASHINGTON — The United States economy demonstrated solid growth in the first quarter of 2026, registering a 2% annualized rate for the January-through-March period, according to data released Thursday by the Commerce Department. This figure represents a sharp increase from the 0.5% growth recorded in the fourth quarter of 2025. The economic expansion occurred as the United States and Israel launched a destabilizing war with Iran, a conflict that has significantly impacted global markets and domestic prices.
Drivers of Economic Growth
The first-quarter growth was primarily fueled by resilient consumer spending, a substantial rise in business investment, higher exports, and government outlays that resumed following the longest government shutdown on record in the previous quarter. Consumer spending, which accounts for approximately two-thirds of the US economy, grew at an annualized rate of 1.6%. This increase was driven exclusively by services, while spending on goods edged lower. However, when adjusted for a 4.5% increase in prices during the quarter, real consumer spending actually declined at an adjusted rate of -2.5%.
Business investment provided a massive boost to the economy, growing at a stunning 10.4% annualized rate. This marks a significant acceleration from the 2.4% growth seen in the fourth quarter and represents the highest rate of growth since mid-2023. Economists attribute this surge largely to continued investments in artificial intelligence, specifically in equipment and software. Core GDP, a key gauge of underlying demand known as real final sales to private domestic purchasers, also strengthened, posting an annualized rate of 2.5% compared to 1.8% in the prior quarter.
Impact of the Iran Conflict on Prices and Policy
The ongoing conflict in the Middle East, now in its ninth week, has introduced significant economic pressures. Global oil prices remain firmly above $100 a gallon, keeping US gas prices elevated. While initial tax returns helped offset the early uptick in fuel prices, economists warn that any boost from tax refunds for consumers is likely to be wiped out if high oil prices persist. The conflict has also prompted the Federal Reserve to delay any further interest rate cuts.
Despite the geopolitical instability, major stock indexes have rebounded to or near record highs. Chris Zaccarelli, chief investment officer at Northlight Asset Management, noted that as long as the economy continues to grow and companies maintain earnings growth, stock prices can remain high even in the face of higher energy prices and inflation. However, he cautioned that the longer the war drags on, the more nervous investors may become, potentially leading to market pullbacks.
Future Economic Outlook
The first-quarter data indicates that the economy entered the Iran war on strong footing. Most companies have reported robust first-quarter earnings, and the AI-driven investment boom continues to support business spending. However, the prolonged nature of the conflict poses risks to long-term stability. Olu Sonola, head of US economics at Fitch Ratings, stated that the longer the conflict continues, the greater the risk that higher energy prices will push inflation up and ultimately dampen economic growth. While the AI sector remains a strong pillar, other areas of the economy may remain anemic if the conflict persists.
