The U.S. economy expanded at a 2% pace in the first quarter, a sharp rebound from 0.5% growth in late 2025, but the strength masks underlying weakness as consumer spending slows amid rising inflation and geopolitical tensions.
Government spending and artificial intelligence investment are driving growth while ordinary Americans reduce purchases, economists say. The economy is being propped up by federal spending increases and domestic investment surges rather than consumer demand.
The conflict with Iran, now in its second month, has pushed crude oil prices to $126 a barrel—a 13% jump in a single day. Consumer inflation expectations rose nearly a full percentage point in one month to 4.7%, as higher energy costs ripple through gas prices, heating, shipping and groceries.
After laying off 355,000 federal workers and slashing spending last year, Washington reversed course. Government spending jumped 10 percentage points from the previous quarter. Domestic investment surged 6.4%, largely driven by the AI boom.
The Federal Reserve faces pressure from the Trump administration to cut interest rates, a move that could ease borrowing costs but could turbocharge inflation. Fed Chair Jerome Powell has maintained a "hold and wait" strategy but complained that the institution is being "battered" by the White House.
The Pentagon is seeking congressional approval for $1.5 trillion in additional military spending on top of the $25 billion already spent on the Iran conflict.
The 2% growth figure appears decent on paper but depends on continued government deficits and hopes that oil prices stabilize before higher energy costs fully work through the system, analysts say. Slower consumer growth in the face of rising prices could lead to either a soft landing or a harder economic downturn in coming weeks, when revised GDP estimates arrive.
