U.S. Economy Expands By 2% In First Quarter But Iran War Muddies The Outlook

The U.S. economy expanded by 2% in the first quarter of the year, rebounding after the last three months of last year’s 0.5% increase.

The Commerce Department noted that the federal government’s spending and investment grew by 9.3% annual rate in the reported period, adding more than half a percentage point to growth.

Growth in consumer spending slowed to 1.6% in the same period, a 0.3% decrease compared to the previous quarter. The area accounts for 70% of the country’s economic activity.

However, business investment rose by 8.7%, likely boosted by spending in artificial intelligence. The outlook is being clouded by the economic impact of the war with Iran, which has caused oil prices to soar and has no end in sight.

Heather Long, chief economist at the Navy Federal Credit Union, said in a note that the U.S. is experiencing a “split-screen economy.”

“Companies and investors involved in AI are on fire. Meanwhile, middle and moderate income households are struggling with high gas prices,” she added, noting that consumption is also slowing “as people are struggling to manage all their bills and growing more concerned about the future.”

The Commerce Department also released on Thursday a key inflation gauge closely followed by the Federal Reserve, which jumped to its highest level in almost three years.

Year-to-year prices rose by 3.5% in March, the Commerce Department said on Thursday. Compared to last month, prices rose 0.7%.

The impact of oil prices played an outsized role: gas prices rose over 20% compared to the previous month.

Once excluding the volatile component, along with food, core inflation rose by 0.3% compared to the prior month. The inter-annual rate stood at 3.2%, above February’s reading of 3%.

The development adds to concerns about the cost of living, which have spiked further as a result of the war.

A recent survey showed that affordability remains the single biggest financial concern for households across the country.

A Gallup poll conducted between April 1 and April 15 among U.S. adults, showed that 31% of respondents identified inflation and high prices as the most important financial problem facing their families. Although lower than the 41% peak recorded in 2024, the figure remains among the highest seen in over two decades.

The survey, which captured a broad national sample, highlights how rising costs across essential categories continue to dominate financial anxieties. Energy costs in particular have emerged as a growing worry, with 13% of participants citing them, up by 10 percentage points from last year and the highest level since 2008. The results were published before the latest Commerce Department report.