The U.S. economy picked up speed at the start of 2026, but the war in Iran is casting a long shadow over what comes next.

The Commerce Department said Thursday that gross domestic product grew at a 2% annual rate from January through March, bouncing back from a weak 0.5% expansion in the final three months of 2025.

The rebound came partly because the federal government had room to spend again after a 43-day shutdown dragged on growth late last year. Government spending and investment grew at a 9.3% annual rate in the first quarter, adding more than half a percentage point to overall growth.

AI boom lifts business investment, housing slumps

Consumer spending makes up to 70% of US economic activity. It grew 1.6% in the first quarter, which is slower than last year’s number of 1.9%. However, it was the business spending that showed a steep rise of 8.7% annual rate, largely driven by the AI spending boom.

Housing, however, remains a drag, with residential investment falling at an 8% annual rate for the fifth straight quarter. Imports surged at a 21.4% annual rate, cutting more than 2.6 percentage points from first-quarter growth.

The report covers a period that includes roughly a month of fighting in Iran. Iran’s blockade of the Strait of Hormuz, through which about a fifth of the world’s oil and gas flows, has pushed energy prices higher, feeding inflation and squeezing consumers. Thursday’s release is the first of three Commerce Department estimates.

Powell calls the economy resilient in final presser

A day earlier, Federal Reserve Chair Jerome Powell said the economy had been “quite resilient” in the face of the energy shock and would likely keep growing above 2% this year. Speaking at his final press conference as Fed chair, he pointed to steady consumer spending and booming data center construction as the main drivers.

“Growth is really solid across our economy,” Powell said. “Some of it is just the apparently insatiable demand for data centers all over the United States. So a lot of business investment going into building data centers, and every reason to think that that continues.”

Powell added that inflation should ease through the year as last year’s tariff-driven price spike fades. But the Fed kept its benchmark interest rate unchanged at 3.50% to 3.75%, citing “a high level of uncertainty” from the Middle East conflict as reported by Cryptopolitan. The Fed’s rate cuts in late 2025 were aimed at protecting the job market, but with rates now near neutral, further easing looks unlikely in the near term.

IMF warns against rate cuts, flags debt risk

The International Monetary Fund, which completed its annual review of the U.S. economy in April, expects GDP growth to reach 2.4% in 2026. But it struck a cautious note on monetary policy, warning the Fed has little room to cut rates this year.

Rising energy prices, the ongoing passthrough of tariff costs to core inflation, and broader commodity price risks all point in the wrong direction for a rate cut. The IMF said easing would only be justified if the job market weakens significantly while inflation falls at the same time.

The fund noted that the U.S. economy performed well in 2025, with growth hitting 2% despite the government shutdown and a shifting policy environment. But it flagged longer-term concerns. The general government deficit is expected to stay in the 7% to 7.5% of GDP range, with debt potentially exceeding 140% of GDP by 2031.

The IMF warned that this fiscal path poses risks not just for the U.S. but for the global financial system, given the central role of U.S. Treasury markets worldwide.

On trade, the IMF acknowledged that tariff uncertainty is expected to weigh on U.S. activity and spill over negatively to trading partners. It urged Washington to work with other countries to reduce trade barriers and address the distortions driving global imbalances.

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