Dive Brief:
- U.S. economic growth rebounded during the first three months of 2026, expanding at a 2% annual rate as companies pumped record levels of investment into artificial intelligence.
- Business spending on equipment and structures surged 10.4% during the first quarter, the most robust rate since Q2 2023, the Bureau of Economic Analysis said Thursday. Consumers shook off surging gas prices during March — the first full month of the Iran war — and increased spending during Q1 by 1.6%, the BEA said.
- Future economic growth hinges on the duration of the Iran war, RSM U.S. Chief Economist Joe Brusuelas said. “Should the war continue, expect further increases in oil prices and a declining supply of refined products, which will take a toll on the real economy and, in turn, equity valuations,” he said in a note.
Dive Insight:
Artificial intelligence contributed 0.97 percentage point to GDP growth during the first three quarters of 2025, exceeding the 0.81 percentage point gain in GDP from technology investment during the outlay for internet adoption in 2000, according to the Federal Reserve Bank of St. Louis.
Worldwide spending on AI is forecast to total $2.52 trillion in 2026, 44% more than last year, according to Gartner. Amazon, Google, Microsoft and Meta this week reported increased outlays on data centers and other technology essential to AI.
The boost to economic growth from AI may not counteract the drag from protracted conflict in the Middle East, according to economists.
“It would not take much for the Iran war to cause a recession, partly because recession odds were already uncomfortably high before the war broke out,” Moody’s Analytics Chief Economist Mark Zandi said Thursday, noting that the odds of recession during the next 12 months have hovered at around 40% since the start of 2026.
“Behind these already high odds are a soft job market and struggling housing activity,” he said in a LinkedIn post. “The economy is vulnerable to anything else that goes wrong, and the Iran war is just that.”
Without an end to a blockade of the Strait of Hormuz, a greater portion of consumer spending will likely shift to spending on gasoline, reducing demand for services and other goods and slowing economic growth. Spending by consumers fuels about two-thirds of growth.
The average price for a gallon of gasoline has surged about 44% since U.S. and Israeli warplanes launched strikes against Iran on Feb. 28 — from $2.98 to $4.30 on Thursday, according to AAA.
Even with a resolution of the Iran war in the next few weeks, economic growth will probably fall short of potential and unemployment will drift higher from the 4.3% rate in March, Zandi predicted.
Higher energy prices will complicate efforts by Fed policymakers to curb inflation to their 2% target.
The personal consumption expenditures price index excluding volatile food and energy prices — the Fed’s preferred gauge of inflation — rose 0.3% in March and 3.2% on an annual basis, the BEA said Thursday. So-called core PCE last increased at a faster pace in November 2023.
Fed Chair Jerome Powell said on Wednesday that the U.S. economy so far is plowing forward despite the supply shock from higher energy prices.
“The U.S. economy has been expanding at a solid pace,” Powell said during a press conference after policymakers decided to hold the federal funds rate steady at a range between 3.5% and 3.75%.
Still, “the economic outlook remains highly uncertain, and the conflict in the Middle East has added to this uncertainty in the near term,” Powell said.
“Higher energy prices will push up overall inflation,” he predicted, adding “beyond that, the scope and duration of potential effects on the economy remain unclear, as does the future course of the conflict itself.”
