The resilience of the U.S. economy is temporarily holding up under the test of war: GDP grew by 2% in the first quarter, and inflation accelerated in March, piecing together the outlook of the Federal Reserve not cutting interest rates.

At the beginning of this year, driven by strong commercial and consumer demand, the US economy accelerated its growth. According to preliminary estimates released by the US Bureau of Economic Analysis on Thursday, the inflation-adjusted Gross Domestic Product (GDP) grew at an annual rate of 2% in the first quarter, slightly below the expected 3%, but still far higher than the previous 0.5%. The longest federal government shutdown in US history restricted economic growth in the last few months of 2025. The US economy maintained resilience in the first quarter, with inflation accelerating. Consumer spending, which accounts for about two-thirds of economic activity, exceeded expectations, reaching 1.6%, mainly driven by service demand. Business spending on equipment and facilities increased by 10.4%, the fastest growth in nearly three years, thanks to rapid investments in the field of artificial intelligence. Although higher tax refunds helped support household spending, the GDP report showed that inflation pressures sharply increased in March due to the war leading to a spike in gas prices. The Federal Reserve's preferred inflation measure - the Personal Consumption Expenditures (PCE) price index - rose by 0.7% in March, the largest increase since 2022. According to another data from the Bureau of Economic Analysis (BEA), this index rose by 3.5% compared to the same period last year. Since then, gas prices have continued to rise, reaching the highest levels since 2022. Excluding food and energy prices, the core PCE price index rose by 0.3% in March after seasonal adjustments, pushing the annual inflation rate to 3.2%, in line with general expectations. However, the core inflation rate reached its highest level since November 2023. Meanwhile, the core PCE price index rose by 4.3% year-on-year in the first quarter, exceeding expectations. The primary driver of accelerating inflation comes from the Middle East. According to data from the American Automobile Association (AAA), the average gas price in the US reached $4.18 per gallon on April 28, the highest level since the outbreak of the Iran war and also the peak since April 2022. Since the outbreak of the conflict on February 26, gas prices nationwide have risen by approximately $1.20, an increase of up to 40%. On February 26, two days before the outbreak of the Middle East conflict, the average gas price in the US was only about $2.98 per gallon. In the two months since, American consumers have spent an additional $150 on gas, and economists predict that this figure will approach $800 by the end of the year. Furthermore, while US household demand cooled compared to the previous quarter, part of the reason may reflect the severe winter weather in most parts of the US. After inflation adjustments, household spending rose by 0.2% in March, mainly due to increased spending on items such as cars and household goods, lower than expected. According to the US Department of Labor report, for the week ending April 25, seasonally adjusted initial jobless claims were 189,000, a decrease of 26,000 from the previous week, significantly lower than the previous estimate of 212,000. This is the lowest level since September 1969, and over the past year, the US labor market has remained in a pattern of low hiring and low firing. Since trade and inventory fluctuations can often distort GDP, economists closely monitor a narrower measure of potential demand, the final sales to private domestic purchasers. This indicator increased by 2.5% in the first quarter, rebounding from the previous quarter. The report notes that despite the spike in oil prices and disruptions in the global supply chain caused by the Middle East conflict, the US economy remains robust. However, if inflation-burdened consumers become more cautious, geopolitical tensions could weaken the outlook for economic growth. In the first quarter of this year, job growth averaged 68,000 new positions per month, compared to just 20,000 in the same period last year. The pace of labor market growth has slowed significantly compared to 2023 and 2024. Some economists attribute this to Trump's trade and immigration policies, which they believe have reduced labor demand and supply. A weak labor market has hindered wage growth. Tariffs have raised prices for some goods, although their impact on official inflation data has been relatively moderate. Economists say consumers are relying on savings or reducing savings to sustain spending, a situation they believe cannot continue indefinitely. In March, the pace of household spending growth continued to outpace income growth (because wage growth is not keeping up with income growth), and the savings rate fell slightly to a new low in four years. Economists warn that rising inflation could offset some of the expected stimulus effects of tax cuts. They predict that the boost from significantly increased tax refunds will soon fade, leading to weakened consumer spending this year. Economists expect that the Middle East conflict will put pressure on economic growth starting in the second quarter. AI investment driving economic growth In the midst of macroeconomic turmoil, US tech giants are unleashing an unprecedented wave of capital expenditures. The combined capital expenditures of Alphabet, Amazon, Meta, and Microsoft in 2026 are expected to reach a staggering $725 billion, primarily for building artificial intelligence and cloud data centers. This figure exceeds the GDP of Switzerland and is higher than the previous estimate of around $650 billion. The spending plans of these companies are astounding: Microsoft's capital expenditure is expected to be around $190 billion in 2026, an increase of over 60% year-on-year; Amazon maintains an estimate of $200 billion; Alphabet's guidance is raised to $180 billion to $190 billion; Meta's full-year capital spending is raised to $125 billion to $145 billion. Financial data shows that Amazon's capital expenditure in the first quarter reached $44.2 billion, and Microsoft's capital expenditure and financing lease expenses reached $31.9 billion, a significant increase of 49% year-on-year. Federal Reserve Chairman Powell said at his last press conference during his term that the US economy "is quite resilient," partly because the demand for data centers across the US "seems endless." However, this demand is facing major obstacles: the Iran war has caused oil prices to skyrocket by about 50%, with impacts spreading from the transportation sector to all stages of data center component manufacturing. Whether AI investments can generate commercial returns in a stagflation environment is becoming a central suspense in the capital markets of 2026. Uncertainty in the path of rate cuts for the Federal Reserve Federal Reserve officials this week kept rates unchanged, but with increased uncertainty due to the Iran war, there is growing divergence in their policy outlook. However, what truly ignited market attention was the voting result: 8 in favor, 4 against, marking the highest number of dissenting votes since October 1992. The four opposing voters did not have a unified stance: Federal Reserve Board Member Stephen Milne advocated for a 25 basis point rate cut, while Cleveland Fed President Hamak and three others supported keeping rates unchanged but the opposing statement included language indicating a bias towards easing. This means that the divergence in policy paths from dovish to hawkish has become increasingly difficult to reconcile. In terms of market expectations, JPMorgan's chief US economist Feroli pointed out that despite the downside risks brought by energy shocks to the economy, the more pressing issue is the upward pressure on inflation. It is expected that the Federal Reserve will keep rates unchanged for the whole of 2026, with the next rate adjustment likely to be an increase, expected in the third quarter of 2027. Morgan Stanley has abandoned its previous forecast of rate cuts by the Federal Reserve in 2026, now predicting that rate cuts will start next year. The pace of economic growth may support the financial markets' expectation that the Federal Reserve will keep rates unchanged, as long as the labor market does not deteriorate, rates may remain unchanged until 2027. Even the US interest rate futures data shows that, after the release of US economic data, market expectations for rate hikes before the end of 2026 have slightly increased.