Q1 GDP Reveals America on Firm Footing

Amid all the handwringing over the war in Iran, Q1 US GDP accelerated. Though war affected only March—and Strait of Hormuz traffic remains constricted—ongoing growth and less conflict since then should help quell fears it is having an outsized effect on the economy’s functioning. We think stocks see this, too, and didn’t wait for confirmation.

As Exhibit 1 shows, headline GDP (green bars) accelerated to 2.0% annualized from Q4’s government shutdown-depressed (and downwardly revised) 0.5%. Notably, goods imports, which feed into domestic demand, surged 25.8% annualized in Q1 after declining for three quarters in Liberation Day’s wake a year ago.^[i] In Q2 2025, they plunged -35.0% annualized (after Q1 2025’s 52.0% front-running jump), then continued dipping at single-digit rates last Q3 and Q4. It seems with tariff uncertainty fading, stockpiled inventories dwindling—and more deals and workarounds in place—businesses are fulfilling pent-up demand for imported items.

Exhibit 1: Private Sector Demand Growth Steadier Under the Hood

Source: FactSet, as of 4/30/2026.

But looking at America’s private sector components (gold bars)—the sum of consumer spending, business investment and residential investment—reveals steadier growth under the hood. In Q1, this “core” GDP sped from Q4’s 1.6% to 2.2% annualized, the middle of its range over the last two years. The trend persists.

What underpins these core components’ growth? Headlines hype AI and data center capital expenditures, with information processing equipment outlays booming 43.4% annualized after Q4’s 37.0% and software speeding to 22.6% from 4.8%.^[ii] Outside technology hardware, industrial equipment rose 3.9% annualized, rebounding from Q4’s -3.6% dip, while “other” (e.g., construction, agricultural, oil services, office, retail, hospitality, healthcare) equipment gained 10.9%, flip-flopping with declines over the last six quarters.^[iii]

Transportation equipment dropped -9.2% annualized, contracting further from Q4’s -28.5% plunge and Q3’s -4.2%.^[iv] This three-quarter contraction coincides with the Trump administration’s tariffs on light vehicles and parts last spring and on heavy commercial vehicles (and parts) last fall—perhaps alongside the expiration of electric vehicle tax credits. Both are well-known headwinds, not sneaking up on stocks.

Despite weak spots, sum it all and Q1 business investment contributed 1.1 percentage points to headline GDP growth—matching consumer spending, which rose 1.6% annualized, a slight slowdown from Q4’s 1.9%.^[v]

Residential investment contracted -8.0% annualized in Q1, but because of its small 3% GDP weight, it subtracted only -0.3 percentage point from headline growth.^[vi] And this weakness isn’t new. Residential investment has shrunk in seven of the last eight quarters—without derailing broader economic expansion.

Put it all together and the economy is on firmer footing than many think. Consumer spending—mainly services (think healthcare, rent, insurance and utilities)—is mostly non-discretionary; it tends not to change much quarter to quarter. In March, real (inflation-adjusted) personal consumption expenditures (PCE) rose 0.2% m/m, matching the monthly average since January 2022 despite a 0.7% surge in the headline PCE price index, the biggest jump since June 2022 amid rampant supply shocks.^[vii]

The price driver (or dagger) last month? Prices at the pump spiked 21.5% m/m.^[viii] (See our March CPI story for more.) Outside this, core PCE prices (excluding food and energy) rose just 0.3% m/m, slowing from February’s 0.4%. Fear of higher energy costs bleeding into other goods doesn’t show in data. And it likely won’t. Oil spikes drive substitution, chiefly—not inflation. But echoing March retail sales, PCE shows higher gas prices haven’t prompted much substitution, either. Perhaps they eventually show in weaker discretionary spending, but all spending adds to GDP. And even in that scenario, the effect probably wouldn’t be huge.

To see this, consider the other side of the ledger: disposable personal income (DPI), which rose 0.6% m/m in March.^[ix] Now, that means real DPI fell -0.1% m/m last month, but the overall trend shows DPI keeping up with inflation, rising 0.2% on average, again since January 2022—matching real PCE gains. $4 gas garners lots of attention, but don’t overrate it. It amounts to 1.7% of overall spending. Large as gas’s effects feel at the pump, and as hard as it can be for lower-income households (which we don’t dismiss), for the broad US economy, substitution probably won’t bite other categories hard.

Big picture: Overall and on average, personal income growth continues supporting consumer spending. Although Q1 data are all in the past, they indicate America’s economy wasn’t on shaky footing pre-war. That doesn’t appear to have changed since.