Weekly Economic Outlook: Q1 GDP Tracking 2.0%, But Mediocre Beneath the Surface

For all the chatter about Artificial Intelligence lifting economic growth, GDP isn''t showing it yet. Real GDP likely grew at a 2.0% annual rate in the first quarter, matching the average annualized pace of growth since the peak in late 2007, right before the Financial Panic and Great Recession. In other words, mediocre growth.

The Headline Hides a Weaker Picture

The details for Q1 are likely worse than the headline suggests. Real GDP grew at a slow 0.5% rate in Q4 2025, in part because it was artificially held down by a lack of federal government purchases during a prolonged shutdown. Excluding government, Q4 real GDP grew at a 1.7% rate. In the first quarter, this process should work in reverse — federal purchases returned to normal in Q1, which should artificially boost the headline GDP figure.

We estimate that although overall real GDP grew at a 2.0% pace in Q1, excluding government purchases it grew at roughly 1.1%. Robust growth, this is not. The US economy is not in recession, but it is not in a boom either. Government spending boomed during COVID and has not fully returned to its pre-COVID level, and it has been roughly flat over the past year. In time, that normalization will help boost growth — but in the short-term it can cause some indigestion.

Consumption

Auto sales declined at a 2.1% annual rate in Q1, while inflation-adjusted retail sales excluding autos rose at a 1.8% rate and real service spending appears up at a 2.6% pace. Combined, that brings our estimate of real consumer spending to a 1.6% rate, adding roughly 1.1 percentage points to real GDP growth (1.6 × the 68% consumption share of GDP).

Business Investment

We estimate a 2.4% growth rate for business investment, with gains in equipment and intellectual property leading the way and commercial construction a continuing drag. A 2.4% growth rate would add about 0.3 points to real GDP growth (2.4 × the 14% business investment share).

Home Building

Residential construction remains weak and appears to have declined at roughly an 11.0% rate in Q1, possibly reflecting a lack of workers to build homes while stricter immigration enforcement frees up more units for rent. An 11.0% annualized drop would be a 0.4-point drag on real GDP growth (-11.0 × the 4% residential construction share).

Government

The Q4 federal shutdown artificially held down purchases, setting up a rebound. We estimate government purchases rose at a 6.5% rate in Q1, adding roughly 1.1 points to GDP growth (6.5 × the 17% government purchase share).

Trade

The trade deficit appears to have widened slightly in Q1, though this forecast may shift with Wednesday''s trade report. For now, we project net exports will reduce Q1 real GDP growth by about 0.3 percentage points.

Inventories

Businesses appear to have added to inventories at a faster pace in Q1 than in late 2025, which should contribute about 0.2 percentage points to real GDP growth.

Bottom Line

Add it all up and Q1 real GDP growth lands near 2.0%. Strip out government and underlying growth is closer to 1.1% in Q1 after 1.7% in Q4 — the epitome of mediocre growth. The AI investment cycle may eventually show up in the productivity and GDP data, but it has not yet.

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Credit: Brian S. Wesbury, Chief Economist.

Disclosure: This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.