U.S. Economy Grows 2% in Q1 as Consumer Spending Offsets Iran War Impact

The U.S. economy grew at a solid pace in the first three months of the year, despite soaring energy prices triggered by the war with Iran. The Commerce Department said Thursday that the nation's gross domestic product grew at an annual rate of 2% in January, February and March. That's a significant improvement from the anemic 0.5% growth rate in the previous quarter, when economic activity was depressed in part by a six-week government shutdown. Government spending has largely rebounded, rising at a rate of 4.4% in the first quarter And consumers continue to spend freely in a wide range of areas, even as more of their paychecks are being gobbled up at the gas pump. Spending power may have been boosted during the quarter by tax refunds, which on average are about $330 larger this year than last. "I do think the tax refunds were really critical, particularly in March," says Mark Zandi, chief economist for Moody's Analytics. "That really does help particularly lower- and middle-income households who are more cash strapped. That refund goes right into spending." Consumers help drive the economy Personal spending rose at an annual rate of 1.6% during the quarter, helping to offset weaker areas of the economy including a sluggish housing market. "As is typically the case, it's the consumer that's driving the economic train," Zandi says. He wonders, though, if lower-income consumers will be able to maintain that level of spending once their tax refunds are gone. The conflict with Iran continues, with oil prices on Thursday hitting a four-year high. That threatens to keep gas prices high and to push up overall inflation. Wealthier families have it easier, with spending propped up by a rising stock market and home values. Zandi notes that the top 20% of earners — people making more than $175,000 a year — account for 60% of all personal spending. "That gives you a real clear sense of how top heavy consumer spending in the economy is," Zandi says. "When things are going well and the stock market is hitting highs on a daily basis, that's going to provide a lot of juice to spending by that group and it's going to keep the economy moving forward. But it feels like it would be much more healthy if we saw a broader distribution of spending."