GDP improves to start 2026, driven by AI investment

Economic growth picked up in the first quarter of this year, even as the country went to war in the Middle East.

GDP rose at an annual rate of 2% from January to March, according to data published Thursday by the Bureau of Economic Analysis. That was slightly below economists’ expectations, but was a significant improvement from the 0.5% growth in the final three months of last year. Part of the recovery was due to the end of the longest-ever government shutdown, but a big reason for last quarter’s GDP growth was AI-related investment.

Cornell University economic professor Eswar Prasad, Oxford Economics chief U.S. economist Michael Pearce, and Wells Fargo senior economist Shannon Grein all agreed that AI is pretty much driving economic growth right now.

“You have the spending on actual equipment, like data centers, showing up in there, and then you have businesses investing in different types of AI software,” Grein said.

Pearce said it’s not just that businesses are pouring money into AI, but also the boost that it’s providing to the stock market. He said, in turn, that strong stock market is propping up the top contributor to the U.S. economy — consumer spending.

“Even though it’s going to higher-income, older, wealthier households, they’re responsible for a lot of the spending in the economy,” Pearce said.

He said some of the AI excitement is, ironically, limiting economic growth because U.S. firms are sending money abroad to import chips and computer parts.

“A lot of that equipment comes from South Korea, from Taiwan,” Pearce said.

But with so much activity concentrated in one industry, there’s a question of whether this is economically sustainable.

“There are some risks. I’ll put it that way,” said Stephen Kates, a financial analyst with Bankrate.

But he said compared to, say, the dot-com bubble of 2000, the AI boom appears broader.

“Construction is happening, equipment is being used,” Kates said.

And Kates said companies like the chip maker Nvidia are making revenue from sales, not just relying on investment.

“This is not Pets.com, that… always ran negative profits,” he said.

Looking ahead, Grein said she’ll be watching consumer spending for hints of where GDP might be headed later this year.

“Just in the wake of the ongoing conflict in Iran, sustained inflationary pressure, the slowing labor market, all of these sort of headwinds that are facing the consumer sector,” she said.

Thursday’s report showed a slowdown in consumer spending on goods. If it continues, Grein said that could be a drag on economic growth.