US Economy Grows 2% in Q1 Despite War, Inflation Pressures Build
The U.S. economy expanded at a 2% annualized rate in the first quarter, rebounding from last quarter's sluggish 0.5% growth, but inflation surged 4.5% and economists warn the ongoing Iran war will increasingly drag on growth if it persists.
GDP Accelerates But Falls Short of Expectations
Gross domestic product registered a 2% annualized rate in the January-through-March period, the Commerce Department said Thursday, up sharply from the fourth quarter's 0.5%, though that was slightly lower than the 2.3% rate economists projected.
Business Investment Drives Growth
US economic growth in the first quarter was boosted by resilient consumer spending, a massive uptick in business investment, higher exports (which contribute to GDP), and government outlays that came back online after the longest government shutdown on record in the prior quarter. Businesses' spending grew by a stunning 10.4% annualized rate in the first quarter, up sharply from 2.4% in the fourth quarter and the highest rate of growth since mid-2023.
Inflation and War Risks Loom
When taking into account the 4.5% increase in prices during the quarter, real spending was actually down in the beginning of the year, at an adjusted rate of -2.5%. The Middle East conflict is now in its ninth week, and economists broadly agree that the longer it lasts, the more damage it will inflict on the inflation-rises-to-32percent-v6Cm1NcA">US economy, prompting the Federal Reserve to delay any further rate cuts, with global oil prices still firmly above $100 a gallon.
AI Investment Sustains Momentum
The increase was solely driven by business investment in equipment and software, indicative of continued investments in AI, with one economist noting "The AI build-out will continue to support investment," though some say those robust investments might be masking weaknesses in other areas of the economy.