U.S. GDP (Gross Domestic Product) grew at a +2.0% annualized rate in the first quarter, reflecting solid economic expansion, albeit at a slightly slower pace than forecasters had expected. This marks a meaningful improvement from the fourth quarter of 2025, which was significantly impacted by a government shutdown-induced slowdown. Business investment was a key driver of growth in the first quarter, particularly in areas tied to artificial intelligence (AI). The ongoing AI boom has spurred increased spending on computer chips, servers, power generation, and related infrastructure, as companies race to expand their capabilities and position themselves as leaders in this transformative technology.
Consumer spending rose at a +1.6% annualized pace during the quarter, a still-healthy rate, though softer than expected. Meanwhile, consumer sentiment remains subdued. The University of Michigan’s consumer sentiment index fell to 49.8 in April, its lowest reading on record, down from 53.3 in March. Elevated energy prices tied to the Iran conflict likely contributed to the decline, alongside concerns about AI-related job displacement, persistent inflation, and private credit market headlines.
While it is important to monitor the health of the consumer, who accounts for roughly 70% of U.S. GDP, sentiment data should be interpreted cautiously. In recent years, survey-based sentiment measures have not consistently aligned with actual spending behavior.
Despite weaker sentiment, the broader economy has remained resilient. Many companies cited a solid operating backdrop during first-quarter earnings calls. Several major banks also noted that household finances appear stable, with consumers continuing to borrow, invest, and spend. Fiscal support measures, including business expensing provisions and above average tax refunds, have further supported economic activity.
One anticipated tailwind for markets entering the year, lower interest rates, has yet to materialize, as inflation remains persistent. The core Personal Consumption Expenditures (PCE) Price Index, which excludes food and energy, rose to a 12-month rate of +3.2% in March, well above the Federal Reserve’s +2% inflation target. Higher energy prices pushed headline PCE inflation even higher, to +3.5% year over year.
At the start of the year, markets were pricing in two to three rate cuts throughout 2026; however, expectations have since shifted, with markets now anticipating no cuts in the near term. How Federal Reserve Chair nominee Kevin Warsh and policymakers navigate this environment will be an important factor to watch going forward.
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