By Lucia Mutikani
WASHINGTON, April 30 (Reuters) – U.S. economic growth likely accelerated in the first quarter on a rebound in government spending after a crippling government shutdown, but the pickup is expected to be short-lived as the war with Iran drives up gasoline prices and squeezes household budgets.
The anticipated increase in gross domestic product last quarter also would reflect robust growth in business investment in equipment, fueled by an artificial intelligence spending boom and the building of data centers underpinning the technology.
The Commerce Department’s advance estimate of first-quarter gross domestic product on Thursday is, however, expected to show consumer spending losing further momentum even before the U.S.-Israeli war with Iran raised the average U.S. gasoline price to above $4 a gallon.
“We remain in relatively slow growth mode, nothing exciting,” said Brian Bethune, an economics professor at Boston College. “There’s nothing really to get a good fire going. There are some warm embers, but there is no fire out there.”
GDP growth likely increased at a 2.3% annualized rate last quarter, a Reuters survey of economists predicted. Estimates ranged from a 0.2% pace of contraction to a 3.9% growth rate.
The survey was concluded before data on Wednesday showed non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, jumped 3.3% in March. That rise was partially offset by a sharp widening in the goods trade deficit because of imports, though some of the products ended up as inventory at business warehouses.
Economic growth slowed to a 0.5% pace in the October-December quarter. A contraction in federal government outlays lopped off 1.16 percentage points, the most since the first quarter of 1994.
Economists expected a partial reversal, with overall government spending estimated to have contributed at least a full percentage point to GDP growth last quarter. They believed the moderate growth pace would be sufficient for the Federal Reserve to hold interest rates steady, possibly into 2027, as long as there was no deterioration in the labor market.
The U.S. central bank on Wednesday left its benchmark overnight interest rate in the 3.50%-3.75% range, noting rising concerns about inflation.
“In the current environment they don’t need to do anything right now to support the labor market,” said Gus Faucher, chief economist at PNC Financial. “They can keep rates where they are through the rest of 2026 and into 2027 until we get a better picture of what happens with the situation in Iran and energy prices and what’s happening with the labor market.”
Employment growth averaged 68,000 jobs per month in the first quarter compared to the monthly gain of 20,000 during the same period last year. The labor market has slowed significantly compared to 2023 and 2024, with some economists blaming President Donald Trump’s trade and immigration policies, which they said had reduced labor demand and the supply of workers.
The soft labor market has cooled wage growth. Tariffs have raised prices of some goods, even though the pass-through to official inflation numbers has been fairly moderate. Economists said consumers have relied on savings or been saving less to maintain their spending, which they said could not continue indefinitely. The saving rate was 4.0% in February.
WEAKER CONSUMER SPENDING ANTICIPATED
Consumer spending, which accounts for more than two-thirds of the economy, is expected to have slowed further from the fourth quarter’s 1.9% growth rate. A Reuters survey forecast the Personal Consumption Expenditures Price Index increased at a 3.8% rate last quarter after rising at a 2.9% pace in the fourth quarter. That index is one of the inflation measures tracked by the Fed for its 2% inflation target.
Higher inflation could offset some of the anticipated stimulus from tax cuts, economists warned. The boost from larger tax refunds was expected to fade soon, leading to what they said would be weaker spending this year.
“The saving rate went down to support consumer spending and I don’t think it’s going to go down any further,” said Boston College’s Bethune. “With the increase in inflation, real wages are pretty much flat … There’s nothing here that is going to propel consumer spending meaningfully.”
Double-digit growth is anticipated for business spending on equipment, taking the slack from consumer spending. But outside the AI-related investments, business spending was probably not as spectacular amid ongoing weakness in non-residential structures like factories.
The AI spending boom is pulling in imports, leading to a widening in the trade deficit that likely subtracted from GDP growth last quarter. With some of the imports ending up in warehouses because of slowing consumer spending, the hit from the shortfall was probably blunted by the accumulation of inventories.
Residential investment is expected to have contracted for a fifth straight quarter as high mortgage rates continue to stifle the housing market. Economists expect the war in the Middle East to weigh on economic growth from the second quarter.
“We see the conflict’s drag on the economy peaking in the second quarter, with consumer discretionary spending among the most adversely impacted,” said Oren Klachkin, financial market economist at Nationwide. “There is a risk the damage could spill over into the second half of the year.”
(Reporting by Lucia Mutikani; Editing by Paul Simao)
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