The Line: Economic Growth Picked up in 1Q26

Today, we have the latest on GDP and PCE from the BEA. If you know what all those letters mean you’re either an economist or read this column every week. Welcome to the three-letter edition of The Line.

Economic Growth Picked up in 1Q26

Gross domestic product, which is the value of all the goods and services produced in the US, rose at a 2% annual rate in the first quarter. This figure was much higher than the fourth quarter’s 0.5% rate, but slightly below expectations.

The formula for GDP is C + I + G + (X-M). Let’s see how each category performed last quarter:

C is for cookie. Just kidding, C is for consumption or in plain English what you and I buy. That contributed 1.08% to overall GDP.

I is for investment, which added 1.48% due to a surge in nonresidential business investment, much of which was in AI.

G is government, which after a sharp contraction in 4Q25 due to a record shutdown added 0.73%.

(X-M) is net exports, which was theonly category to subtract from theoverall GDP number (-1.3%)

Add that all up and you get 1.99%, which rounds up to 2.0%. Not bad growth, but not great either. Thebig question is what happens going forward. We know that job growth has been flat since the beginning of 2025, even though jobless claims just fell to a 57-year low. The war in Iran has reignited inflation—see thenext item in this column—which will make it hard for consumers to continue buying stuff. My best guess is that economic growth will hover between 1.5% and 2% for the rest of the year, with no chance of a recession.

Core Inflation Up To 3.2% Over the Past Year

The core personal consumption expenditures price index—better known as core PCE—rose 0.3% in March and was 3.2% higher than a year ago. This is the Federal Reserve’s favorite measure of inflation because it is based on more comprehensive data on prices and spending than theconsumer price index.

Remember that any time you see “core” before a price index it means that food and energy prices are not included, as they can be very volatile. That volatility was evident in the 20.9% jump in gas prices last month. If we look at the overall index including food and energy prices, it was up 0.7% in March and 3.5% higher than a year ago.

We could dismiss this surge in prices as a temporary thing that will come down after the war ends. Theproblem is the war is still raging on, and as I always say prices come down at a much slower pace than they rise. And even though thecore inflation data looks much better than the overall figure, thesurge in gas prices will bring up thecost of everything we buy, have you seen how expensive it is to fly right now? So expect the core number to continue to tick up in thecoming months.