U.S. gross domestic product expanded at an annualized 2.6% pace in the first quarter, the Bureau of Economic Analysis reported Wednesday morning ahead of the FOMC meeting, materially above the 1.9% consensus estimate from a Reuters poll of 78 economists. The print marked an acceleration from the fourth quarter's 2.3% rate and was the fastest opening-quarter growth since Q1 2023.
The composition of growth was notable: nonresidential fixed investment soared at a 9.4% annualized pace — the strongest contribution since Q4 2021 — driven by an 18.7% surge in equipment spending and a 12.3% rise in intellectual property products. Both categories captured the AI infrastructure build-out and accelerated capex from energy producers responding to elevated oil prices. Consumer spending decelerated to 1.4% from 2.6%, reflecting the softer March retail sales mix outside auto and gasoline categories.
Inflation Components
The GDP price index rose at 3.4% annualized, up from 2.5% in Q4. Core PCE inflation accelerated to 3.0% from 2.4%, in line with the consensus and up from the 2.0% Fed target. Friday's separate March monthly core-PCE release is now expected to print at 3.0% year-on-year, a level that effectively shuts the door on near-term FOMC easing.
Net exports subtracted 0.6 percentage points from headline growth as oil-import volumes climbed and U.S. shipments to Europe slowed amid the Iran-conflict-related shipping disruptions. Government consumption added 0.4 percentage points, with defense outlays up 5.2% reflecting Operation Persian Phoenix authorizations.
Market Reaction
Treasury yields jumped on the release: the 2-year climbed 5 basis points to 4.12% before the FOMC press conference, while the 10-year added 4 basis points to 4.36%. The dollar strengthened 0.4% on the day. Rate-cut probabilities for the June meeting collapsed from 14% to 6% on the Fed-funds futures curve. The S&P 500 wavered between flat and +0.3% before settling 0.4% higher post-Powell.
Outlook
Wells Fargo economist Jay Bryson revised the bank's full-year 2026 GDP forecast to 2.1% from 1.7% on the back of the Q1 surprise. Risks remain skewed to the downside in H2: a further Iran-conflict escalation could push Brent above $105, while a slowdown in hyperscaler AI spend after the wave of mega-cap earnings would remove a key investment growth pillar. The next major data point is Friday's March monthly PCE, followed by Friday week's nonfarm payrolls.