US Economy Slows to Below-Trend Growth as Trade Uncertainty Clouds AI Investment Outlook
US Economy Slows to Below-Trend Growth as Trade Uncertainty Clouds AI Investment Outlook
The United States economy grew at an annualized rate of 1.3% in the first quarter of 2026, the Bureau of Economic Analysis reported on Friday, falling short of the 1.8% consensus forecast and underscoring the mounting headwinds facing the world’s largest economy as the second quarter gets underway. The reading marked the third consecutive quarter of deceleration and the weakest pace of growth since the second half of 2023, when the Federal Reserve’s aggressive rate-hiking cycle was still weighing on activity across the board.
The miss followed a year of resilient but decelerating growth, as consumers and businesses alike grew increasingly cautious amid escalating trade tensions, volatility in technology sector investment, and persistent uncertainty about the Federal Reserve’s next policy moves. Economists surveyed ahead of the release had expected a reading closer to 1.8%, with some forecasters warning that the ongoing trade conflict with China and sweeping new tariffs on imported goods could further depress activity in the quarters ahead. The Atlanta Fed’s GDPNow model, which tracks incoming data in real time, had pencilled in a contraction as recently as two weeks before the release.
“The Q1 GDP report is a clear signal that the U.S. economy is not immune to the global slowdown or to the uncertainty created by the tariff regime,” said Rhea Patel, chief economist at Meridian Securities in New York. “Business confidence is falling, hiring has slowed, and consumers are starting to feel the pinch from higher prices on everything from electronics to home furnishings.”
Trade Tensions and Tariff Uncertainty Weigh on Business Investment
Business investment contracted 2.1% in the first quarter, the BEA said, the sharpest pullback in capital spending in nearly two years. The decline was driven primarily by a 6.3% drop in intellectual property investment and a 4.8% fall in equipment spending, both reflecting the uncertainty created by shifting tariff policy and retaliatory measures from trading partners including China, the European Union, and Canada. Manufacturers reported the sharpest decline in new orders since the pandemic, with the Institute for Supply Management’s factory index posting its third consecutive month below 50, the threshold that separates expansion from contraction.
“We have been mapping out capex plans for the next 18 months, but with tariffs changing every few weeks, it is nearly impossible to commit to long-term contracts,” said Chen Masan, chief economist at Global Trade Analytics in Singapore, in remarks that captured the sentiment of CFOs across the industrial sector. “Our clients are deferring decisions on everything from new equipment to facility expansions until there is more clarity on the trade policy landscape.”
Consumer spending, which accounts for roughly 70% of U.S. GDP, rose a modest 1.8% — down from 2.1% in the fourth quarter of 2025 — as households digested the impact of higher prices on imported goods and as wage growth failed to keep pace with the renewed inflation pressures created by tariffs. Real disposable income grew just 0.9% in the quarter, the slowest pace since mid-2023, while the personal savings rate slipped to 3.2%, the lowest since November 2022. Households have been drawing down savings accumulated during the pandemic-era stimulus to maintain spending levels, a trend that economists say is unsustainable over the medium term.
AI Investment Surge Cannot Offset Broader Slowdown
Artificial intelligence and data center investment continued to surge, rising 22.4% year-over-year in the first quarter, according to Commerce Department data released separately. That surge — led by massive capital programs from the five largest U.S. technology companies — has been a hallmark of the current economic cycle, supporting demand for electricity, construction, and advanced semiconductors. But even that robust growth was insufficient to offset weakness in housing, manufacturing, and business equipment investment, and economists questioned whether the AI capex boom could be sustained if corporate confidence continues to deteriorate.
Residential construction fell 3.2%, weighed down by elevated mortgage rates that have kept many potential homebuyers on the sidelines. The 30-year fixed mortgage rate averaged 7.1% in April, according to Freddie Mac, near its highest level in two years and a significant barrier for first-time buyers. Housing starts dropped to an annualized rate of 1.32 million units, the lowest since early 2024, as builders citing regulatory costs and financing uncertainty pulled back on new projects. Manufacturing output declined 0.8%, with the automotive sector particularly affected by new steel and aluminum tariffs that raised input costs for domestic producers.
Federal Reserve officials have been watching these dynamics closely. The FOMC held rates steady at its May meeting for the third consecutive time, citing “incoming data that does not give us greater confidence that inflation is moving sustainably toward our 2% objective” while acknowledging that “the risks to employment and output have tilted to the downside.” The minutes, released alongside the decision, revealed that several officials noted “tariff-related uncertainty” as a factor that could delay or deter business investment and hiring, and that the committee would need to see “several months” of favorable data before considering any adjustment to the current policy stance.
Looking ahead, forecasters are divided on the near-term trajectory. The International Monetary Fund cut its U.S. growth forecast for 2026 to 1.4% in its latest World Economic Outlook, down from the 2.0% it had projected in January, citing the drag from trade disruption and the likelihood that monetary policy remains restrictive well into the second half of the year. Goldman Sachs economists revised their full-year forecast to 1.6%, warning that the cumulative effect of tariffs now in place could shave an additional 0.3 percentage points from GDP growth by year end if no trade deal is reached. The consensus, such as it is, points to an economy that is slowing but not yet in recession — a gray zone that gives the Federal Reserve little room to maneuver and leaves businesses and households alike in a state of uneasy waiting.
