GDP rebounds for early 2026 but falls short of expectations
Nick Rummell
WASHINGTON (CN) — After a poor showing to end 2025, the U.S. economy recovered to expand by 2% despite headwinds from the war with Iran, a report released Thursday shows.
The preliminary estimate for gross domestic product in the first quarter of 2026 by the U.S. Bureau of Economic Analysis is better than the 0.5% estimate from the fourth quarter of 2025. It is also slightly higher than the 1.2% increase the Federal Reserve Bank of Atlanta forecast in its closely watched GDPNow estimate.
However, the GDP growth is less than the 2.2% to 2.3% most economists had predicted and shows some signs of contraction due to the war, particularly in the manufacturing industry.
The services sector, especially healthcare, propped up nearly the entire U.S. economy, with data showing a 1.1% increase last quarter compared with a slight decrease among purchased goods.
“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,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management. “However, the longer the war drags on, the more investors will grow nervous.”
The 2% GDP growth estimate is the first of three the BEA will issue on how well the U.S. economy fared during the first quarter, and if it follows last year’s trend the number could shrink. The GDP numbers for the fourth quarter initially came in a 1.4% increase but subsequent revisions chopped that down to a final 0.5% growth.
In other areas, the war continues to take its toll. Oil prices have been a big impediment to growth, with barrels of Brent crude this week hitting a four-year high of more than $122 a barrel. Before the war, prices hovered around $70 a barrel.
Inflation also has remained high, according to a separate release Thursday morning from the BEA, which showed a 0.7% increase in the personal consumption expenditures price index and marks a three-year high for inflation.
The monthly personal consumption expenditures — the total of household spending on goods and services that is the Federal Reserve’s preferred measure of tracking inflation — matched expectations. Analysts had predicted a jump in prices due to rising oil prices, and the 3.2% year-over-year increase in core inflation, which excludes food and energy prices, supports that.
Experts hope the PCE is a one-off, but it certainly shows inflation again moving in the wrong direction. March’s PCE showed a 0.4% monthly increase and a 2.8% annualized increase, compared with the big jump for April.
“We are relatively optimistic that the U.S. economy will withstand the global supply shocks, at least in the short run, but we are becoming more concerned that the global economy is going to have a much more difficult time weathering the upcoming storm,” Zaccarelli said.
Despite the war’s effects on the economy, consumer confidence surprisingly edged up slightly this month, according to The Conference Board in an April report. The board’s confidence index showed a 0.6 percentage-point increase to 92.8 points for April, compared with 92.2 points in March.
The board’s “expectations index," based on consumers’ short-term outlook for income, business, and labor market conditions, also rose by 1.2 points to hit 72.2 points. While the job availability component also improved, it still shows consumer worries about increasing unemployment.
“While consumers were less pessimistic about their income expectations in April, they had fewer plans to buy big-ticket items or spend on services,” Grace Zwemmer, economist at Oxford Economics, wrote in an investors’ note. “We expect the hit to real disposable income growth from higher oil prices will cause spending to slow to close to 2% in 2026, down from 2.6% in 2025.”