The U.S. economy accelerated at the start of the year, lifted by a sharp increase in business investment in equipment and intellectual property.
Gross domestic product, adjusted for inflation, expanded at a 2.0 percent annual rate in the first quarter, the Commerce Department said Thursday. That was a rebound from the 0.5 percent pace recorded in the final three months of 2025, when the record-long government shutdown weighed on federal spending and disrupted parts of the economy.
A closely watched measure of underlying private demand, real final sales to private domestic purchasers, rose at a 2.5 percent annual rate, up from 1.8 percent in the prior quarter. The measure strips out trade, inventories and government spending, making it a cleaner gauge of the private economy’s momentum.
That strength came despite a slowdown in consumer spending, which rose at a 1.6 percent pace after increasing 1.9 percent in the fourth quarter. Spending on goods was essentially flat, while services spending continued to rise, led by health care.
The stronger signal came from businesses. Nonresidential fixed investment jumped at a 10.4 percent rate, the fastest pace in nearly three years. The increase was concentrated in the categories most closely tied to future productivity: equipment and intellectual property. Equipment investment rose at a 17.2 percent rate, while investment in intellectual property products, including software, climbed 13.0 percent.
By contrast, structures remained weak. Nonresidential structures declined and residential investment fell sharply, reflecting continued softness in housing.
The artificial-intelligence buildout appears to be a major factor driving growth. The Commerce Department said the increase in equipment investment was led by information-processing equipment, particularly computers and peripheral equipment. Investment in intellectual property was led by software.
Tax policy may also be playing a role. The tax law signed by President Trump last year restored 100 percent first-year expensing for many forms of qualified business property acquired and placed in service after Jan. 19, 2025. It also restored current-year expensing for domestic research and experimental expenditures beginning in 2025. Those provisions were designed to reward companies for buying equipment, expanding productive capacity and investing in innovation.
Trade was a drag on the headline number. Imports rose at a 21.4 percent rate, outpacing a 12.9 percent increase in exports. Because imports subtract from GDP, the surge held down overall growth even though it also reflected strong demand for goods, including computer-related equipment. Net exports subtracted 1.3 percentage points from first-quarter growth.
Government spending also rebounded after the shutdown-related decline in the fourth quarter. Overall government spending rose 4.4 percent, with federal nondefense spending increasing sharply as employee compensation recovered from the shutdown disruption.
The central bank held its benchmark interest-rate range steady during the first quarter, even as inflation remained above its 2 percent target. The Fed’s March projections put longer-run real GDP growth at 2.0 percent, up from 1.8 percent in December. First-quarter GDP growth matched that latest estimate, while the cleaner private-demand measure grew faster.
For Fed officials worried about inflation, the report gives little reason to rush toward rate cuts. Growth is firm, private demand accelerated, and price pressures remained elevated. The personal consumption expenditures price index rose at a 4.5 percent annual rate in the first quarter, up from 2.9 percent in the prior quarter. Excluding food and energy, PCE prices rose 4.3 percent, up from 2.7 percent. Those figures are far above the Fed’s two percent target.
But the investment figures also raise a different possibility: that the economy’s speed limit may be rising. If the AI buildout and pro-investment tax changes are lifting productivity and expanding productive capacity, then stronger growth need not imply the same degree of inflationary pressure as a consumer-led boom.
For now, the report shows an economy that is neither weak nor narrowly dependent on household spending. Consumers slowed. Housing contracted. Inflation remained a problem. But businesses sharply increased investment in the equipment, computers and software that shape future output.
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