American families are pulling back sharply on spending as higher gasoline prices caused by the war with Iran strain household budgets, new government data reveals, even as the overall economy expanded at a 2.1% annual pace from January through March. The Commerce Department's final estimate of first-quarter growth upgraded its previous estimate of 1.6%, but the revision exposed a troubling reality: consumer spending, which accounts for around 70% of U.S. economic activity, fell sharply from fourth-quarter 2025 and from the previous estimate.
Families Bear the Burden
Heather Long, chief economist at Navy Federal Credit Union, said, "It was unsettling to see consumer spending revised even lower," and added, "Spending is likely to tick up in (the second quarter), but it's worth watching carefully... It's been a tough few months for American consumers, but most have been able to make it through. The question is how much relief is coming" as the U.S. and Iran continue talks toward a resolution of the conflict. The spending slowdown comes after a 43-day federal government shutdown weighed on the economy in 2025, when growth slowed to just 0.5% in the last three months of the year.
The first-quarter growth marked a rebound from that shutdown period, but the benefits have been unevenly distributed. While business investment surged, probably reflecting an investment boom in artificial intelligence, working families have seen their purchasing power eroded by energy costs. Excluding housing, private investment jumped 10.6%, up from 2.4% in fourth-quarter 2025. Investment in information-processing equipment jumped at a 39.9% pace as companies scrambled to outfit their data centers.
Corporate Investment Boom Raises Questions
Michael Reid, head of U.S. economics at RBC Capital Markets, said before the report came out that "unfortunately, it's not a sustainable path." He said he expected data center investment to lose momentum going forward. The disconnect between corporate investment gains and household struggles highlights concerns about whether economic growth is benefiting ordinary Americans.
Residential investment, weighed down by high interest rates, dropped 7.8% from January through March, the biggest fall since late 2022 and the fifth straight quarterly decline. The housing market downturn compounds affordability challenges for families already stretched by higher living costs. Federal government spending and investment rose at a 9.4% clip in the first quarter after dropping 16.6% in October-December 2025, largely because of the government shutdown.
Job Market Shows Resilience
Imports, which are subtracted from GDP, grew at a slower pace than last estimated from January through March. They still subtracted 1.49 percentage points from first-quarter growth, but that was down from a 2.59 percentage-point hit in the previous estimate and was a major factor in the upgrade. The U.S. economy, the world's biggest, has continued to chug along despite the Iran energy shock. The American job market has proven especially resilient. Employers added an average 188,000 jobs a month from March through May after adding fewer than 10,000 a month in 2025 amid uncertainty over President Donald Trump's trade and immigration policies.
The Commerce Department said Thursday's report was its third and final estimate of first-quarter GDP growth, and the first look at second-quarter economic growth is due July 30.
Why This Matters:
The sharp decline in consumer spending reveals how geopolitical conflicts and energy price shocks disproportionately burden working families while corporate investment thrives. With consumer spending representing 70% of economic activity, sustained weakness threatens the broader recovery and raises questions about economic equity. The five consecutive quarters of residential investment decline compounds housing affordability challenges, making homeownership increasingly out of reach for middle-class families. While job growth has rebounded, the combination of stagnant consumer spending, high gas prices from the Iran conflict, and elevated interest rates suggests many households are struggling despite headline economic growth. The trajectory of ongoing U.S.-Iran negotiations will directly impact family budgets, and whether economic gains reach ordinary workers or remain concentrated in corporate balance sheets will shape the sustainability of this recovery.