US Economy Grows 2% but Iran War Clouds Recovery
Blockade of the Strait of Hormuz drives up energy costs, fueling inflation and prompting the Fed to hold rates steady. While AI-driven business investment surged, consumer spending and housing remain weak.
Apr 30th 2026 · United States
The U.S. economy expanded at a modest 2-per-cent pace in the first quarter of 2026, rebounding from a weak 0.5-per-cent growth rate in the final quarter of 2025 that was dragged down by a 43-day federal government shutdown last fall. However, the Commerce Department report released Thursday showed that the economic recovery is being threatened by the Iran war, with Iran blocking the Strait of Hormuz through which a fifth of the world's oil and liquefied natural gas passes. This disruption has driven energy prices higher, fueling inflation and creating uncertainty that prompted the Federal Reserve to keep interest rates unchanged on Wednesday. Consumer spending, which accounts for 70 per cent of U.S. economic activity, slowed to 1.6 per cent in the first quarter from 1.9 per cent at the end of 2025, while business investment likely driven by artificial intelligence surged at an 8.7-per-cent pace. The federal government's spending and investment grew at a 9.3-per-cent annual rate, adding more than half a percentage point to growth after subtracting 1.16 percentage points in the previous quarter. A weak housing market continued to weigh on the economy, with residential investment falling at an 8-per-cent annual pace for the fifth consecutive quarter. Meanwhile, a surge in imports at a 21.4-per-cent annual rate shaved more than 2.6 percentage points off first-quarter growth. Economists struggled to assess the outlook given the unprecedented nature of the Strait of Hormuz blockade. Carl Weinberg, chief economist at High Frequency Economics, said he did not bother forecasting first-quarter growth, stating that President Donald Trump's war with Iran has created a situation that cannot be modeled because it has never been seen before. Heather Long, chief economist at the Navy Federal Credit Union, described the current economic conditions as a "split-screen economy," noting that AI companies and investors are thriving while middle and moderate-income households struggle with high gas prices and growing concerns about their financial future. Thursday's report was the first of three Commerce Department estimates.