Weekly Economic Trends and Indicators
The Headlines:
The Bureau of Economic Analysis (BEA) reported last week that U.S. real GDP increased at a 2.0% seasonally adjusted annual rate in the first quarter of 2026. This was an increase from the revised 0.5% in the fourth quarter of 2025. (All growth rates stated here are seasonally adjusted annual rates.)
This report also contains important measures of inflation. The price index for gross domestic purchases increased 3.6% in the first quarter (3.7% in fourth quarter 2025). The personal consumption expenditures (PCE) price index increased 4.5% (2.9% in fourth quarter 2025), and the core PCE price index (excluding food and energy) increased 4.3% (2.7% in fourth quarter 2025).
The Details:
Consumer spending grew more slowly in the first quarter, increasing 1.6% compared to 1.9% in the fourth quarter and 3.5% in the third quarter. Investment, exports, and government purchases took up the slack and helped put overall GDP growth close to the long-run trend.
The 2.0% growth rate was lower than many analysts expected. However, there were indications that growth could have been even lower. The Atlanta Fed GDPNow tracking forecast had declined steadily during the quarter briefly dipping below 1.0% in mid-April. The main disparity between GDPNow and other forecasters was the recovery of federal government spending following the shutdown in the fourth quarter. Federal spending increased at a 9.3% rate in the first quarter compared to a decrease of 16.6% in the fourth quarter. The fact that we did not gain back all of what was lost is what caused disappointment among many observers.
In terms of contributions to GDP growth, business investment added the most, contributing 1.48% of the 2.0% growth. Consumption accounted for 1.08%, exports contributed 1.32% and government contributed 0.73%. Imports surged in the first quarter, subtracting 2.62% from the overall growth rate.
The Context:
The 2.0% overall growth rate conceals the fact that some parts of the economy are performing better than others. Business investment in AI is having an oversized effect on growth right now. Intellectual property product investment has now grown at a 5% rate or greater (13.0% in the last quarter) for 5 quarters in a row, boosting GDP growth by as much as half-a-percent compared to the trend prior to the surge in AI investment.
In the other direction, residential investment has contracted nationwide for 5 quarters in a row, largely due to inflation adding additional pressure to mortgage rates.
Slowing consumption growth is the larger concern, especially now as gasoline prices are elevated due to geopolitical tensions. If prices remain high through the summer, it could cause a decline in tourism spending and slow overall consumption further.
The dilemma for the Fed is that higher inflation and a hot market for AI will make it hard to justify a rate cut to help consumers and the labor market.
Next week: National employment report
