First-quarter GDP chopped to 1.6%. Here's why - and what it tells us about the economy.

By Jeffry Bartash

Business investment in AI boosts U.S. growth

The U.S. economy has been growing and recession-free for almost six years.

The U.S. economy wasn't all that great in the first three months of the year. But it wasn't terrible, either.

Gross domestic product, the official scorecard of the economy, was revised down to show 1.6% annual growth in the first quarter, instead of 2%, which was previously reported.

The downgrade stemmed largely from weaker consumer spending. Businesses also produced fewer inventories, or unsold goods, than initially reported.

A breakdown of consumer spending, however, tells a more complicated story.

Spending on durable goods was revised up to a 0.4% increase from a small decline as originally reported. Typically, spending on expensive durable goods - new cars, appliances, laptops and the like - declines when households feel financial stress.

Yet the rate of spending on services was revised down to 1.8% from 2.4%. How come? The government somehow concluded that spending on healthcare rose by the smallest amount in four years.

It's good that Americans are spending less on healthcare, but it's also hard to believe, given long-running trends in these expenses rising steadily year after year.

The biggest source of growth for the economy, meanwhile, was quite strong in the first quarter even after the latest GDP refresh.

Business investment in equipment jumped 17%, mostly reflecting a boom in spending on artificial intelligence and the associated technology.

Although headline GDP draws a lot of attention, economists prefer to view the economy through the lens of a different measure known as inflation-adjusted final sales to domestic buyers. It gives a cleaner look at economic trends.

This measure expanded at a much healthier 2.4% rate in the first quarter, compared with the official 1.6% GDP figure.

Sales to domestic buyers tell us how much businesses are selling to their customers in the U.S. - both consumers and other companies.

It strips out government spending, inventories, imports and exports - all of which can exaggerate the headline GDP number up or down.

Whatever the case, GDP is backward-looking, and doesn't tell us much about what is going on in the economy now.

The most recent forecasts point to faster economic growth in the spring despite a surge in gas prices tied to the Iran conflict.

The Atlanta Federal Reserve's GDPNow forecast, for instance, predicts a frothy 4.3% growth rate in the second quarter. Wall Street DJIA SPX economists are more conservative in their predictions.

Second-quarter GDP won't be released until the end of July.

A big reason the economy is still expanding steadily is business spending. Companies can afford to keep investing at high levels due to strong profits.

Adjusted pretax corporate profits rose almost 4% in the first quarter on the heels of a 26% spike in the fourth quarter and a 19% increase in the 2025 third quarter.

Most other figures in the GDP report were little changed.

-Jeffry Bartash

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-28-26 0952ET