Research
June 25, 2026
GDP
U.S. economy grew modestly in Q1, up 2.1%, despite signs of consumer cautiousness
The U.S. economy expanded at a 2.1% annual rate in the first quarter of 2026, up from the previous estimate of 1.6% growth. It was a notable acceleration from the 0.5% pace posted in the fourth quarter of 2025, which was dampened by the federal government shutdown. The latest revision reflected a reduced drag from net exports, but service-sector spending was also weaker than the previous estimate.
Despite the revision, first-quarter growth was supported by business investment, service-sector spending, and increased government outlays, reflecting a rebound in federal activity. Investment growth was buoyed by capital spending on equipment and intellectual property products, likely for AI investments.
Total consumer spending and fixed investment, a proxy for underlying domestic demand, rose at a 1.8% annual rate in the second straight quarter, suggesting very modest growth in domestic demand overall.
Despite modest growth, several areas of weakness remain. Net exports and housing investment weighed on growth, consumer spending on goods was essentially flat, and service-sector spending was weaker than desired. These trends suggest that households remained somewhat cautious entering the new year, despite the stronger headline GDP figure.
Looking ahead, the National Restaurant Association expects the economy to remain resilient, with real GDP projected to grow 2.4% in 2026. While energy prices are likely to moderate in the coming months, economic uncertainty and affordability challenges are expected to persist. Even so, the U.S. economy continues to demonstrate resilience, and a resolution to the war in Iran could help restore momentum in the second half of the year.
A closer look at the data shows weakness in the consumer spending data in the first quarter. Growth in goods and services spending grew by just 0.5% at the annual rate in Q1, slowing markedly from 1.9% in Q4 and marking the weakest pace in four years. Personal consumption expenditures added just 0.37 percentage points to headline growth, down from 0.95 percent in the previous estimate.
Investment activity was notably strong in Q1, rising 7.9% at an annual rate, driven by sharp gains in equipment (+15.8%) and intellectual property (+13.8%) investment as firms continue to invest in AI capital spending. In contrast, investment in structures (-4.7%) remained a persistent drag, falling for the ninth straight quarter, while residential investment (-7.8%) declined for the fifth consecutive quarter. Businesses only slightly rebuilt their inventories for the second quarter in a row after drawing them down over the prior two quarters. In total, gross private domestic investment contributed 1.35 percentage points to topline GDP growth.
Net exports subtracted 0.37 percentage points from real GDP in Q1, an improvement from the 1.25 percent drop seen in the prior estimate. Imports (+11.8%) grew somewhat more rapidly than exports (+10.9%). Encouragingly, both imports and exports rebounded after contracting in Q4, pointing to a pickup in global trade activity.
Following the federal government shutdown that weighed heavily on growth in Q4, federal government spending rebounded sharply in Q1, increasing 9.4% and adding 0.57 percentage points to GDP. State and local government spending also strengthened, rising 1.6% and contributing an additional 0.17 percentage points to overall real GDP growth.
Despite the revision, first-quarter growth was supported by business investment, service-sector spending, and increased government outlays, reflecting a rebound in federal activity. Investment growth was buoyed by capital spending on equipment and intellectual property products, likely for AI investments.
Total consumer spending and fixed investment, a proxy for underlying domestic demand, rose at a 1.8% annual rate in the second straight quarter, suggesting very modest growth in domestic demand overall.
Despite modest growth, several areas of weakness remain. Net exports and housing investment weighed on growth, consumer spending on goods was essentially flat, and service-sector spending was weaker than desired. These trends suggest that households remained somewhat cautious entering the new year, despite the stronger headline GDP figure.
Looking ahead, the National Restaurant Association expects the economy to remain resilient, with real GDP projected to grow 2.4% in 2026. While energy prices are likely to moderate in the coming months, economic uncertainty and affordability challenges are expected to persist. Even so, the U.S. economy continues to demonstrate resilience, and a resolution to the war in Iran could help restore momentum in the second half of the year.
A closer look at the data shows weakness in the consumer spending data in the first quarter. Growth in goods and services spending grew by just 0.5% at the annual rate in Q1, slowing markedly from 1.9% in Q4 and marking the weakest pace in four years. Personal consumption expenditures added just 0.37 percentage points to headline growth, down from 0.95 percent in the previous estimate.
Investment activity was notably strong in Q1, rising 7.9% at an annual rate, driven by sharp gains in equipment (+15.8%) and intellectual property (+13.8%) investment as firms continue to invest in AI capital spending. In contrast, investment in structures (-4.7%) remained a persistent drag, falling for the ninth straight quarter, while residential investment (-7.8%) declined for the fifth consecutive quarter. Businesses only slightly rebuilt their inventories for the second quarter in a row after drawing them down over the prior two quarters. In total, gross private domestic investment contributed 1.35 percentage points to topline GDP growth.
Net exports subtracted 0.37 percentage points from real GDP in Q1, an improvement from the 1.25 percent drop seen in the prior estimate. Imports (+11.8%) grew somewhat more rapidly than exports (+10.9%). Encouragingly, both imports and exports rebounded after contracting in Q4, pointing to a pickup in global trade activity.
Following the federal government shutdown that weighed heavily on growth in Q4, federal government spending rebounded sharply in Q1, increasing 9.4% and adding 0.57 percentage points to GDP. State and local government spending also strengthened, rising 1.6% and contributing an additional 0.17 percentage points to overall real GDP growth.
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