The US economy expanded at a 2% annual rate in the first quarter of 2026, a sharp turnaround from the previous quarter's near-stall, though the rebound masks growing strains on household finances as the Iran conflict drives up energy costs and inflation expectations.
Government spending surged 4.4% after contracting 5.4% in the final quarter of 2025, when federal workforce reductions left the government down 355,000 workers, or 11.8% of its workforce since October 2024. Domestic investment climbed 6.4%, largely fueled by a surge in AI-related spending and the infrastructure to support it.
Consumer spending, however, has lost momentum. Growth slowed 0.3% compared to the prior quarter, a warning sign that households are pulling back as the war erodes confidence and lifts inflation expectations. Consumer inflation expectations jumped from 3.8% in March to 4.7% in April, marking the steepest one-month increase since Trump announced his "liberation day" tariffs a year earlier.
The war's impact on energy markets has become impossible to ignore. Oil prices hit a wartime peak of $126 a barrel on Thursday, jumping 13% in a single day as peace talks between Washington and Tehran stalled over control of the Strait of Hormuz, through which roughly one-fifth of global oil and gas supplies normally flow. The spike follows two months of sustained pressure on crude markets since hostilities began.
The first quarter GDP snapshot captures just one month of the conflict. Annualized inflation data from March already showed a 1% jump to 3.3%, signaling that higher oil and gas prices are beginning to ripple through the broader economy.
The war's financial toll continues to climb. Defense Secretary Pete Hegseth told Congress on Wednesday that military operations have cost at least $25 billion so far, with the Pentagon requesting lawmakers approve an additional $1.5 trillion in defense spending.
The Federal Reserve faces a precarious balancing act. Chair Jerome Powell, speaking at a press conference Wednesday, said the central bank is holding its current interest rate strategy and waiting to see how both the Iran conflict and Trump administration tariffs reshape the economic landscape. Yet Powell also acknowledged the Fed's independence is under siege, saying the institution is "being battered" by political pressure from the White House to cut rates, a move that could worsen inflation.
The GDP reading is the first advance estimate. Two additional revisions are scheduled for release in the coming weeks.
Author James Rodriguez: "The economy's headline rebound is real, but consumer spending weakness and surging inflation expectations suggest households are already bracing for tougher times ahead."
Comments