The US economy grew at a 2% annual rate in the first quarter of 2026, marking a recovery from the 0.5% pace recorded in the fourth quarter of 2025, according to government data released Friday.

The growth occurred despite ongoing war with Iran that has driven up energy prices and raised inflation concerns. Core inflation reached 3.2% in March, reflecting the impact of higher oil costs on the broader economy.

Artificial intelligence investment and government spending helped drive the quarter's expansion, offsetting headwinds from the Middle East conflict. However, consumer spending showed signs of slowing as energy price increases weighed on household budgets.

The previous quarter's weak performance was largely attributed to reduced government spending following significant federal workforce reductions. The federal government eliminated 355,000 positions, representing 11.8% of the federal workforce, since October 2024 according to Bureau of Labor Statistics data.

The first-quarter reading came in slightly below economist expectations but demonstrated the economy's resilience in the face of geopolitical tensions. The AI sector boom continued to provide support for overall economic activity during the three-month period that included the initial weeks of the Middle East conflict.