US economy showed solid growth in the first quarter as Iran war began

By Bryan Mena, CNN

Washington (CNN) — The US economy picked up steam in the beginning of the year as the United States and Israel launched a destabilizing war with Iran that has jacked up prices and is still ongoing.

Gross domestic product, which measures all the goods and services produced in the economy, 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%. That was slightly lower than the 2.3% rate economists projected in a poll by data firm FactSet. GDP is adjusted for seasonal swings and inflation.

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.

A key gauge of underlying demand in the economy even strengthened sharply in the first three months of the year.

The first-quarter figure shows the economy headed into the Iran war on strong footing, boosted by bigger tax returns that helped offset the initial uptick in prices at the pump. So far, most companies have also reported robust first-quarter earnings, and while the Iran war initially spooked investors, the stock market eventually rebounded, with major indexes now at or near record highs.

But 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 US economy. It’s also prompting the Federal Reserve to delay any further rate cuts, with global oil prices still firmly above $100 a gallon, which is keeping US gas prices elevated.

“As long as the economy continues to grow and companies are able to grow earnings, we can see higher stock prices even in the face of higher energy prices and inflation,” Chris Zaccarelli, chief investment officer at Northlight Asset Management, said in an analyst note Thursday. “However, the longer the war drags on, the more investors will grow nervous and we could see some pullbacks as fears ebb and flow.”

‘This is still an AI-driven economy’

Consumer spending, which accounts for about two-thirds of the US economy, grew at an annualized rate of 1.6% in the first quarter, down slightly from the fourth quarter’s 1.9%. The increase was exclusively driven by spending on services, rather than on goods, which edged lower during the quarter.

However, 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%.

Still, the economy got a massive boost by businesses, whose spending grew by a stunning 10.4% annualized rate in the first quarter. That was up sharply from 2.4% in the fourth quarter and the highest rate of growth since mid-2023.

The increase was solely driven by business investment in equipment and software, indicative of continued investments in AI, according to economists, though some say those robust investments might be masking weaknesses in other areas of the economy.

“The AI build-out will continue to support investment,” Oliver Allen, senior US economist at Pantheon Macroeconomics, wrote in a note to clients Thursday. “(But) investment elsewhere will remain anemic.”

Meanwhile, real final sales to private domestic purchasers — referred to as “core GDP” and often seen as a good indicator for where the economy is headed — posted an annualized rate of 2.5% in the first quarter, up from the prior quarter’s 1.8%.

“This is still an AI‑driven economy,” Olu Sonola, head of US economics at Fitch Ratings, said in commentary issued Thursday. “The longer the conflict with Iran drags on, the greater the risk that higher energy prices continue to push inflation up and ultimately dampen growth.”

“For the US consumer, any boost from tax refunds is likely to be wiped out by higher oil prices if they persist,” he added.

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