The US economy expanded at a 2% annualized rate in the first quarter, according to an advance estimate from the Commerce Department released Thursday. This marks a rebound from the 0.5% growth in the final quarter of 2025 but fell short of the 2.2% expansion economists had forecast.
The recovery was driven by a surge in business investment and increased government spending, the report showed. However, consumer spending — a key driver of the economy — decelerated, highlighting growing strain on households as inflation accelerated.
Separate data revealed that the Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, jumped 3.5% year-over-year in March, up from 2.8% in February. Excluding volatile food and energy, core PCE rose 3.2%. The spike was largely attributed to soaring energy costs following the escalation of the Middle East war, particularly disruptions in the Strait of Hormuz, a critical waterway for oil and fertilizer shipments.
"It's a split-screen economy," said Heather Long, chief economist at Navy Federal Credit Union. "Companies and investors involved in artificial intelligence are flourishing, while middle- and moderate-income households are grappling with cost hikes."
White House spokesman Kush Desai defended the growth rate, calling it "driven by an astonishing surge in business investment," and credited President Donald Trump's tax cuts and deregulation agenda.
However, analysts warn that the energy shock from the war could further weaken consumer spending. Long noted that "nearly half of the larger tax refunds have already gone to pay for higher gas prices for many families," adding that while low layoffs are encouraging, "it's a big warning sign that consumption has slowed to just 1.6% in the first quarter."
The average price of a gallon of regular gasoline has hit $4.30, according to the report, as global energy costs climb due to the conflict in the Middle East.