US economy grew 1.6% in Q1, revised lower as the Iran-war drag looms over coming quarters

The US economy grew more slowly than initially estimated in the first quarter of 2026, the Bureau of Economic Analysis reported on May 28, with the figures offering only a partial glimpse of the energy shock from the conflict with Iran that would weigh more heavily on the quarters to follow. Real gross domestic product expanded at an annual rate of 1.6%, an acceleration from the 0.5% pace recorded in the final quarter of 2025 but a downward revision from the 2.0% advance estimate and short of the 2.0% economists had expected.

The 0.4 percentage point markdown primarily reflected weaker readings on investment and consumer spending than first reported. Within investment, the largest revision came from private inventories, particularly in manufacturing and retail, while the consumer spending adjustment stemmed from softer services outlays, led by health care. Even so, the underlying picture of demand held up reasonably well: final sales to private domestic purchasers, a cleaner gauge of household and business demand that strips out trade and inventories, rose a solid 2.4%, an acceleration from the prior quarter.

The headline growth rate was heavily distorted by trade flows. Imports surged about 21% during the quarter, rebounding sharply after several quarters of declines, and because imports are subtracted in the GDP calculation, that jump shaved roughly 1.3 percentage points from growth. Exports also rose strongly, climbing around 13%, while government spending rebounded after a steep drop at the end of 2025 that had reflected a lengthy federal shutdown. The combination left a noisy headline figure beneath which domestic demand looked firmer than the topline suggested.

Corporate profits told a more cautious story. Profits from current production rose by about $40 billion in the quarter, a marked slowdown from the much larger increase in the final quarter of 2025, hinting that the squeeze from rising costs was beginning to bite into margins. Gross domestic income, an alternative measure of output derived from the income side of the accounts, rose a more modest 0.9%, and the average of the two measures pointed to growth of around 1.3%, a touch below the headline GDP rate.

The crucial caveat for markets was timing. The first quarter spanned January through March, and the war with Iran erupted only in late February, meaning the energy shock and the disruption to shipping through the Strait of Hormuz were captured for barely a month of the period. The bulk of the conflict's economic impact, including the surge in fuel prices, the hit to consumer purchasing power and the spike in uncertainty, therefore fell outside the quarter, leaving the GDP report as something of a backward-looking snapshot taken just as the storm was breaking.

Economists warned that the drag was largely still ahead. With gasoline prices elevated, real wages turning negative and policy uncertainty discouraging hiring and investment, growth was widely expected to slow in the second quarter and beyond, even as the labor market held up. The longer the conflict dragged on without a clear path to reopening Hormuz, the greater the risk that the energy shock would meaningfully restrain economic performance through the rest of the year.

For markets, the report did little to alter the prevailing narrative. A modest, downwardly revised growth figure that predated the worst of the shock offered limited new information for a Federal Reserve focused squarely on inflation, and the reaction across the dollar and Treasury yields was muted. Attention remained fixed on the forward-looking indicators and on the conflict itself, with the first-quarter data serving mainly as a reminder of how much the economic story of 2026 would be written in the quarters still to come.