The U.S. economy grew at a 2% annual rate in the first quarter of 2026, but the headline figure masks a deepening divide between corporate profits and household struggles, as middle and moderate-income families grapple with soaring gas prices driven by the Iran conflict while wealthy investors reap gains from artificial intelligence spending.
The Commerce Department reported Thursday that gross domestic product expanded from January through March, rebounding from a 0.5% expansion in the last three months of 2025. However, the recovery follows last fall's 43-day federal government shutdown, which subtracted 1.16 percentage points from growth in the fourth quarter of 2025. Federal government spending and investment grew at a 9.3% annual rate in the first quarter, adding more than half a percentage point to growth as operations resumed.
Households Struggle as Consumption Slows
Consumer spending, which accounts for 70% of U.S. economic activity, slowed to 1.6% in the first quarter from 1.9% at the end of 2025. Spending on goods, including food and clothing, fell slightly, and spending on services slowed. Heather Long, chief economist at the Navy Federal Credit Union, wrote, "This is a split-screen economy," adding, "Companies and investors involved in AI are on fire. Meanwhile, middle and moderate income households are struggling with high gas prices ... Consumption is slowing as people are struggling to manage all their bills and growing more concerned about the future."
The slowdown in household spending comes as Iran has blocked the Strait of Hormuz, through which a fifth of the world's oil and liquefied natural gas passes, driving energy prices higher, fueling inflation and hurting consumers. The first quarter included about a month of the clash in Iran.
Corporate Investment Surges While Housing Falters
Business investment, likely driven by spending in artificial intelligence, rose at an 8.7% pace. Excluding housing, nonresidential investment surged 10.4%, the biggest jump in nearly three years. Yet residential investment fell at an 8% annual pace, the fifth straight quarterly drop and the biggest since the end of 2022, underscoring the housing affordability crisis facing working families.
Imports rose at an annual rate of 21.4% from January through March, cutting more than 2.6 percentage points from first-quarter growth. A category within the GDP data that measures the economy's underlying strength grew at a 2.5% pace, up from 1.8% in the fourth quarter of 2025. That category includes consumer spending and private investment, but excludes volatile items like exports, inventories and government spending.
Uncertainty Clouds Economic Outlook
The Federal Reserve, announcing Wednesday that it was keeping its benchmark interest rate unchanged, cited "a high level of uncertainty" arising from the conflict. Carl Weinberg, chief economist at High Frequency Economics, wrote Monday that he did not even bother to forecast first-quarter GDP growth. "The truth is that we do not have any defensible basis for trying to project how these indicators will print," Weinberg wrote. "Trump's war with Iran has led to a total blockade of the Strait of Hormuz. We do not know how to model the impact of that event, as we have never seen anything quite like it."
Thursday's report was the first of three Commerce Department estimates.
Why This Matters:
The widening gap between corporate investment gains and household economic pain reveals structural inequalities that demand policy attention. While AI-driven business spending surges, ordinary families face falling purchasing power from energy price shocks they cannot control. The fifth consecutive quarterly decline in residential investment reflects a housing market increasingly inaccessible to working people, even as corporate sectors thrive. The Iran conflict's impact on energy costs demonstrates how geopolitical decisions impose disproportionate burdens on middle and moderate-income households already stretched thin. Without targeted intervention to shield consumers from energy price volatility and policies to address housing affordability, economic growth risks becoming increasingly disconnected from the lived reality of most Americans.