The US economy grew at a slower pace than initially estimated in the first quarter, while a key inflation gauge reached its highest level since 2023, signaling mounting pressure on households ahead of midterm elections.
The US economy expanded at a slower pace than initially estimated in the first quarter of 2026, according to revised data released by the Commerce Department on Thursday.
Gross domestic product grew at an annual rate of 1.6 percent, down from the previous estimate of 2.0 percent. The downward revision was primarily driven by weaker investment and consumer spending, with services spending-particularly on medical services-slowing and business inventories falling more than expected. Economist Michael Pearce of Oxford Economics noted that the downward revisions to consumer spending, combined with a slowdown in April, point to consumers coming under increasing financial stress.
This comes as the US Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, rose 3.8 percent from a year ago, the highest year-on-year rate since 2023, up from 3.5 percent in March. In April, personal consumption expenditures increased by 0.5 percent, but disposable personal income fell by 0.1 percent, indicating that Americans are feeling squeezed financially. Heather Long, chief economist at Navy Federal Credit Union, highlighted how households are facing rising costs amid stagnant income growth.
The inflation pressure is largely attributed to surging energy costs following US-Israeli strikes targeting Iran on February 28, which escalated Middle East tensions and led to Tehran's retaliation that effectively blocked the Strait of Hormuz. This key waterway normally facilitates about a fifth of the world's oil and gas supplies and is essential for the global fertilizer trade.
As a result, global energy prices soared, and US gasoline stations saw significant price spikes, adding to the financial burden on consumers ahead of the midterm elections later this year. Data showed that US consumers spent $28.8 billion more on gasoline and related products in April compared to the same month a year ago.
ING chief international economist James Knightley emphasized that since consumer spending accounts for 70 percent of the US economy, the sustained pressure on households poses a significant risk. EY-Parthenon chief economist Gregory Daco added that household budgets are under mounting pressure from rising inflation and a softer income backdrop, while slower wage and job growth weigh on purchasing power.
Broader concerns also include the economy's reliance on an AI investment boom to fuel growth, alongside consumer fatigue from the lingering energy shock due to the conflict with Iran. The step-up between the final months of 2025 and early 2026 was attributed to upturns in government spending and exports, as well as an acceleration in investment, but consumer spending decelerated. Compounding the gloomy data, another government report revealed that sales of new US homes fell in April.
The Commerce Department reported new home sales at a seasonally adjusted annual rate of 622,000, down 6.2 percent from March's rate of 663,000 and 11.3 percent lower than the pace a year ago. The median sales price of new houses rose 8.0 percent from March, while mortgage rates continued to climb. As of the week of May 21, the popular 30-year fixed-rate mortgage averaged 6.5 percent, up from levels seen in the prior month.
These developments indicate a softening housing market, further straining consumer finances. Analysts warn that the combination of slowing growth, persistent inflation, and declining housing affordability could dampen economic momentum in the coming quarters. The Federal Reserve faces a challenging balancing act between controlling inflation and supporting economic growth, especially as the midterm elections approach and political pressure mounts.
The latest data underscores the vulnerabilities in the US economy as it navigates domestic and international headwinds, including geopolitical tensions and supply chain disruptions. Consumers are likely to continue facing higher costs for essential goods and services, while the labor market shows signs of cooling. Policymakers will need to address these issues to prevent a more pronounced slowdown.
The coming months will be critical in determining whether the economy can sustain its expansion or if it will slide into a period of stagflation. The revision of first-quarter GDP and the rise in inflation highlight the fragility of the recovery and the need for careful economic management to support both growth and price stability
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