Key Takeaways:

  • The U.S. economy rebounded in the first three months of 2026, growing at an annualized rate of 2%, as businesses invested record levels in artificial intelligence.
  • The Commerce Department's Bureau of Economic Analysis said Thursday that business spending on equipment and buildings surged 10.4% in the first quarter, the strongest pace since the second quarter of 2023. Consumers shrugged off the spike in oil prices in March, the first full month of the Iran war, with spending rising 1.6% in the quarter.
  • Joe Brusuelas, chief economist at RSM US, said future economic growth depends on the duration of the Iran war. "If the war persists, we expect oil prices to rise further and refined product supplies to decline, which will hit the real economy and in turn drag on stock market valuations," he said in a report.

Deep Dive:

According to the Federal Reserve Bank of St. Louis, artificial intelligence contributed 0.97 percentage points to GDP growth in the first three quarters of 2025, surpassing the 0.81 percentage point contribution to GDP from internet adoption spending in 2000.

According to Gartner, global AI spending is projected to reach $2.52 trillion in 2026, up 44% from last year. This week, Amazon, Google, Microsoft, and Meta all reported increased spending on data centers and other key AI infrastructure.

Economists believe the boost to economic growth from AI may not be enough to offset the drag from a prolonged conflict in the Middle East.

"The Iran war doesn't need to cause a huge shock to trigger a recession, partly because the probability of a recession before the war was already uncomfortably high," Mark Zandi, chief economist at Moody's Analytics, said Thursday. He noted that the probability of a recession within the next 12 months has hovered around 40% since early 2026.

"Behind these already elevated probabilities are a weak job market and sluggish housing activity. The economy is vulnerable to any other unexpected event, and the Iran war is exactly such a shock," he wrote in a LinkedIn post.

If the blockade of the Strait of Hormuz persists, a larger share of consumer spending could shift toward gasoline, reducing demand for services and other goods and slowing economic growth. Consumer spending accounts for about two-thirds of economic growth momentum.

According to AAA, the average price per gallon of gasoline has surged about 44% since U.S. and Israeli warplanes launched airstrikes on Iran on February 28, rising from $2.98 to $4.30 on Thursday.

Zandi predicts that even if the Iran war is resolved in the coming weeks, economic growth could fall below potential, and the unemployment rate will rise further from 4.3% in March.

Rising energy prices will complicate Federal Reserve policymakers' efforts to keep inflation at the 2% target.

Data released Thursday by the Commerce Department's Bureau of Economic Analysis showed that the Personal Consumption Expenditures (PCE) price index, excluding volatile food and energy prices—the Fed's preferred inflation gauge—rose 0.3% month over month in March and 3.2% year over year. The so-called core PCE index last rose at a faster pace in November 2023.

Federal Reserve Chair Jerome Powell said Wednesday that despite the supply shock from higher energy prices, the U.S. economy has so far continued to move forward steadily.

"The U.S. economy has been expanding at a solid pace," Powell said at a press conference after policymakers decided to hold the federal funds rate steady in the range of 3.5% to 3.75%.

However, Powell added: "The economic outlook remains highly uncertain, and the Middle East conflict has heightened this uncertainty in the near term."

"Rising energy prices will push up overall inflation," he predicted, further noting, "Beyond that, the scope and duration of the potential impact on the economy remain unclear, as does the future direction of the conflict itself."