US Q1 GDP Grows by 2%, Slightly Below Expectations, Consumption and AI Investment Are Core Drivers

The US first quarter GDP growth rate rebounded to 2%, supported by AI investment, with a sudden increase in inflation complicating the outlook.

The US Bureau of Economic Analysis released preliminary data on Thursday, showing a first-quarter GDP annualized growth rate of 2%, slightly below the market's expected 2.3%, but a marked improvement over the sluggish performance at the end of 2025, which was hampered by the longest-ever federal government shutdown.

Business fixed investment and consumer spending were the main drivers, but the sudden rise in inflation poses the biggest concern in this report.

Structurally, the core engine of growth in the first quarter was business fixed investment, with equipment and construction investment growth reaching 10.4%, the fastest in nearly three years, led by a significant increase in spending on information processing equipment and software, driven by the continuous surge in demand for AI infrastructure.

Consumer spending growth was 1.6%, better than the expected 1.4%, mainly driven by service demands such as healthcare and financial services. Government spending rebounded by 4.4%, filling the gap caused by the previous shutdown. The Employment Cost Index rose by 0.9% in the first quarter on a quarter-over-quarter basis, accelerating slightly from the previous quarter, indicating that wage pressure in the labor market continues to accumulate.

Net exports, however, subtracted 1.3 percentage points from GDP, with businesses' rush to purchase imported goods following the Supreme Court's February decision to overturn several Trump's tariff measures being the main cause.

As trade and inventory fluctuations can easily distort aggregate data, economists pay more attention to the final sales to private domestic purchasers, an indicator that measures internal demand - this indicator grew at a rate of 2.5% in the first quarter, accelerating from the previous quarter, showing that the economy's internal momentum remains relatively robust.

Inflation data is the core pressure in this report.

The PCE price index rose by 4.3% on an annualized quarterly basis in the first quarter, with a monthly increase of 0.7% in March, the highest since 2022, and a year-over-year increase to 3.5%; the core PCE rose by 0.3% month-on-month, climbing to 3.2% year-over-year, the highest in over two years.

Gasoline prices have now risen to their highest level since 2022, and increased transportation costs may further be passed on to consumer goods, with supply disruptions of fertilizers also putting upward pressure on food prices.

Clear warnings have emerged at the corporate level, with General Motors stating that the Iran war has led to higher-than-expected costs, and both American Airlines and United Airlines have lowered their full-year profit targets due to rising fuel prices.

Fed Chairman Powell described the US economy as "quite resilient" in his last press conference of his tenure, but the path of monetary policy has become significantly complicated.

The Fed kept interest rates unchanged on Wednesday, with three officials dissenting from the accommodative stance, a rare occurrence of internal disagreement recently. The labor market remains a positive factor, with initial jobless claims last week falling to the lowest level since the late 1960s, indicating that mass layoffs have not yet occurred.

The core issues to be followed up are: whether sustained high oil prices in the second quarter can push inflation to accelerate again, whether consumer spending can maintain its resilience against the backdrop of savings rates at a four-year low, and whether policy divergence within the Fed will further intensify before the June interest rate meeting.