US Data Stronger Under the Hood Than Many Realize

Last Friday, the US Bureau of Economic Analysis (BEA) slashed Q4 GDP growth in half after revisions, freaking many out. Predictably, it fed a narrative arguing the economy was weaker than previously thought heading into the Iran conflict, making it more vulnerable to an oil shock and other potential disruptions. But slow down. The latest data show Q1 growth off to a decent start and, looking ahead, we don’t think growth appears to be in jeopardy.

Yes, Q4 US GDP growth was cut to 0.7% annualized from its initial 1.4% estimate.^[i] Personal consumption expenditures (PCE), business investment, government spending and exports were all revised down. Though slower, PCE still rose 2.0% annualized and business investment 1.6%. Combine that with residential investment’s slight detraction and Q4 pure private sector domestic demand rose 1.6% annualized, about the middle of the range over the last four years. (Exhibit 1) It also wasn’t markedly slower than the first estimate’s 2.0% annualized.

Exhibit 1: GDP’s Main Private Demand Components Midrange Even If GDP Isn’t

Source: Federal Reserve Bank of St. Louis, as of 3/13/2026.

As in the first estimate, the big detractor in Q4 was the record-long 43-day government shutdown, which caused federal spending and investment to plunge -16.7% annualized, subtracting -1.2 percentage points from headline GDP growth. Not great for those affected, but that is mostly over now (Department of Homeland Security funding notwithstanding). Like all prior government shutdowns, it didn’t appear to have notable ramifications on the broader private sector economy.

Besides, as the chart shows, past slowdowns—or even outright headline contractions—aren’t an automatic precursor to further weakening. Prior soft patches in Q1 2022 and Q1 2025, after all, weren’t predictive. But while Q4’s GDP revisions weren’t as severe under the hood, that is all water under the bridge almost three months after the fact.

So what about Q1? Real PCE, aka consumer spending, rose 0.4% m/m in January, signaling a good start to the quarter given it comprises more than two-thirds of GDP. (Exhibit 2) But that was January. Could this take a big hit with gas prices up since the Iran conflict erupted at February’s end? We doubt it. Gas is only 1.9% of real PCE.^[ii] And it is still money being spent! The composition could change depending on how higher prices affect volumes sold—and how people substitute. But around half of all vehicle miles driven are for work commutes and shopping (e.g., for daily staples like groceries and other household items). So around half of gas demand is relatively “inelastic” (as economists like to say)—the volumes consumed aren’t likely to change much with price.

Exhibit 2: Spending Doesn’t Always Align With Income, But Growth Is Likely When Both Are Rising

Source: Federal Reserve Bank of St. Louis, as of 3/13/2026.

Then too, as work-from-home trends show, even if people go out less, that doesn’t mean they won’t spend. Less driving—and gas purchases—can free up folks’ budgets for other items they might have been craving. In this way, PCE is more resilient—and less fragile—than it may seem.

And with real disposable personal income (DPI) also up strongly to start the year, there is plenty left in consumers’ tanks in aggregate to keep spending. This is one reason why the Institute for Supply Management (ISM) services purchasing managers’ index hit 56.1 in February. That isn’t only nicely above the 50 mark that indicates more than half of the survey’s responding businesses reported growth, it is the highest level in four years.^[iii]

It is also one reason why the Atlanta Fed’s Q1 GDPNow estimate is running at 2.7% annualized.^[iv] That may not be exactly where the BEA’s official Q1 GDP ends up. But in general, the estimate becomes more accurate towards the end of the quarter with most data in.

Consumption is all fine and good, but the swing factor for the economy is business investment. A substantial part of that is for durable goods orders for equipment (industrial, transportation and information processing), roughly 39% of capital expenditures.^[v] Now, durable goods orders, a volatile dataset—and its steadier subset, nondefense capital goods orders excluding aircraft (aka core capital goods orders)—were flat in January. (Exhibit 3) But notice the trends. Durable goods orders have yet to top their May 2025 record high as tariff uncertainty hit and businesses front-ran levies, but January’s level was still higher than any point before that, while January’s core capital goods orders came in just a shade under its December record high.

Exhibit 3: Durable Goods Orders Trending Upward

Source: Federal Reserve Bank of St. Louis, as of 3/13/2026.

All these data are backward looking, and with the conflict in Iran raging, most expect the economy to weaken from here. But with growth stronger under the hood than many think, we see more potential for upside surprise.