US Economy Expands at 2.0 Percent in 2026 Q1, a Look at the Numbers
The numbers suggest a mixed bag. There were two big distortions in the first quarter.
The BEA reports Real Gross Domestic Product (GDP) increased at an annual rate of 2.0 percent in the first quarter of 2026 (January, February, and March). In the fourth quarter of 2025, real GDP increased 0.5 percent.
Real First-Quarter GDP and GDI
- Real GDP: 2.0%
- Real Final Sales: 1.6%
- Real Final Private Domestic Sales: 2.5%
- Real Final Domestic Sales: 2.8%
- Real GDI: N/A
Real Gross Domestic Income (GDI) is not available in the advance (first) release of the quarter.
The difference between real GDP and Real Final Sales is Change In Private Inventories (CIPI) that nets to zero over time.
Thus real final sales are a better measure than the topline widely reported numbers.
The Fed focuses on Real Final Private Domestic Sales which was a solid 2.8 percent.
GDP vs GDI
GDP and GDI are two measures of the same thing. Income from sales should match products produced.
The BEA calls the difference a “Statistical Discrepancy“.
Since the fourth quarter of 2022 GDP has been consistently above GDI.
Is income understated or is GDP overstated? It could be a little of each. It could be tax evasion and the underground economy.
Tax evasion creates unreported income (missing from GDI) and under-the-table transactions (missing from GDP).
I side with the economists who think GDI is a better set of numbers, but not if the answer is tax evasion and unreported income.
Contributions to GDP
Contributions to GDP Progression
- PCE Services: 1.11 PP
- PCE Goods: -0.03 PP
- Government: 0.73 PP
- Residential Investment: -0.31 PP
- Nonresidential Investment: 1.39 PP
- CIPI: 0.40 PP
- Exports: 1.32 PP
- Imports -2.62 PP
Huge Distortions
- Government spending was a rebound from the shutdown in the fourth quarter of last year.
- The surge in imports was related to the Supreme Court Tariff decision. Importers waited for the ruling then pounced when it happened.
It’s important to note that imports don’t add or subtract to GDP. The D in GDP explains why.
The BEA subtracts imports because they assume all sales are domestic. Otherwise the BEA would be trying to figure out things like “What percentage of this hammer from Home Depot is Domestic?”
Net exports were an anemic -1.3 percentage points, but again, tariff distortions are in play.
Strip out government spending, and you are at 1.3 percent. That 0.73 PP contribution from government won’t be repeated.
Upward Pressure on Interest Rates
Yesterday, I commented There’s Upward Pressure on Interest Rates With a Slight Bias for Fed Hikes
Also note The Long Bond Yield Is Signaling a Huge Fear of Inflation
The 30-year long bond yield is just 17 BPs from a new 18-year high.
This GDP report reinforced the view that hikes are more likely than cuts.
So, good luck to incoming Fed Chair Kevin Warsh if he thinks rate cuts are coming.
For discussion, please see Powell’s Last Meeting as Fed Chair, Rates on Hold, a Dispute Over Future Bias
The Fed can say what it wants, but the price of oil is more important.
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