A fragile balance is emerging across the U.S. economy as growth holds steady but inflation climbs to uncomfortable levels, squeezing consumers and raising new warnings of a slowdown ahead. Fresh government data shows a complex picture: expansion powered by business investment and artificial intelligence spending, while households struggle under rising prices and energy shocks.

The U.S. economy expanded at a 2 percent annual pace in the first three months of the year, according to new government figures. The gain reflects stronger business investment and a rebound in government spending, even as consumer momentum shows signs of weakening under inflation pressure.

Growth picked up from the previous quarter, which was disrupted by the longest government shutdown in history, according to the Commerce Department’s gross domestic product report. GDP measures the total value of goods and services produced in the United States. Still, the result came in below Wall Street expectations of 2.2 percent and remains under the Congressional Budget Office’s estimate of sustainable long term growth without triggering inflation.

Inflation data is sending a more troubling signal.

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Prices rose 3.5 percent in March compared with a year earlier, based on the Federal Reserve’s preferred inflation measure, the personal consumption expenditures index. Core inflation, which excludes food and energy, increased to 3.2 percent from 3 percent in February.

With inflation still well above its 2 percent target, the Federal Reserve left interest rates unchanged on Wednesday, signaling continued caution as price pressures persist.

Trade dynamics also played a major role in the latest GDP reading. Higher export sales supported growth, but imports surged as businesses rushed to stockpile goods following a Supreme Court ruling in February that invalidated much of President Donald Trump’s tariff agenda. The merchandise trade deficit widened to $87.9 billion in March, up more than 5 percent from the previous month, according to the Census Bureau.

“The underlying trend in GDP growth remains solid,” said economist Michael Strain of the American Enterprise Institute. “Worryingly, today’s release also showed clear signs of inflationary pressure.”

Energy markets added further strain. The war in Iran, which began on Feb. 28, disrupted oil and gas flows through the Strait of Hormuz, pushing up global energy costs. Gasoline, diesel, natural gas and jet fuel prices all climbed, with regular gasoline now averaging $4.30 per gallon, a four year high according to AAA.

Consumer behavior is shifting under pressure. Spending on goods has cooled, while services such as dining and live events remain more resilient. At the same time, business investment surged, with spending on equipment rising more than 17 percent from the previous quarter, helping offset weaker household demand.

Much of that investment is tied to the artificial intelligence boom, which continues to act as a major growth engine. Tech companies are accelerating spending on large data centers, fueling demand across the electronics sector and pushing prices higher, according to Michael Pearce, an economist at Oxford Economics.

On Wall Street, markets reacted cautiously, with stocks rising less than 1 percent in midday trading. The GDP report will be revised at least two more times as additional data becomes available.

Despite repeated shocks in recent years, including the pandemic, the war in Ukraine, policy shifts on tariffs and immigration, and ongoing conflict in Iran, the $31 trillion U.S. economy continues to expand, though with growing imbalances beneath the surface.

A key underlying measure of strength, real final sales to private domestic purchasers, rose 2.5 percent in the first quarter, up from 1.8 percent previously. Nearly half of that increase came from AI related spending on computers and software, according to Pantheon Macroeconomics.

The year began with weak momentum. Growth slowed to just 0.5 percent in the final quarter of 2025 following a 43 day government shutdown, sharply down from a 4.4 percent expansion earlier in the year.

Still, officials in the Trump administration are projecting a rebound. Treasury Secretary Scott Bessent has forecast a “great year,” citing tax cuts and deregulation as key drivers.

But economists warn the recovery is increasingly narrow.

"Activity is holding up, but increasingly at the cost of higher inflation and rising vulnerabilities," said Gregory Daco, chief economist for EY Parthenon.

Households are feeling the strain. Inflation adjusted incomes have fallen in consecutive months, forcing many consumers to rely on tax refunds and savings to maintain spending levels. Rising stock markets have supported wealthier households, with the S&P 500 gaining more than 12 percent over the past month and up more than 4 percent this year.

Consumer spending, which accounts for roughly 70 percent of the economy, is expected to weaken in the coming months as tax refund effects fade, according to Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics.

Energy costs are already shaping spending patterns. In March, higher gas and utility prices accounted for nearly half of the monthly increase in consumer expenditures, according to the Commerce Department.

“The tax refunds were good news, certainly for households. But in real terms, there was not much left. Come May, June, July, we’re going to start seeing a sadder summer,” said Beth Ann Bovino, chief economist for U.S. Bank.

Housing remains constrained by mortgage rates above 6 percent, while the labor market has settled into a low turnover pattern, with employers adding just 260,000 jobs over the past year.

Federal Reserve Chair Jerome Powell has said the economic impact of the Iran conflict is “substantially less” in the United States than in Europe and Asia. But rising inflation and slowing growth are fueling concerns about what lies ahead.

“We’re moving towards an adverse scenario where the economy could grow less than 1 percent and should the conflict escalate, a recession is in the cards,” said Daco. “So we’re in this fragile state where economic activity is likely to decelerate as we navigate through the year.”