Economic Update: A Review of First Quarter 2026

The first quarter of 2026 was characterized by a familiar tension between a still-resilient economy and an increasingly mixed set of forward-looking indicators. Economic growth appears to remain positive, but data disruptions and revisions stemming from earlier government shutdown-related reporting issues have complicated analysis. Inflation has continued to moderate from prior peaks but remains above the Federal Reserve’s long-term target. The labor market continues to show a low hire / low fire pattern that hints towards a softening rather than a sharp downturn.

One major source of uncertainty during the quarter has been the ongoing military conflict involving Iran. While the direct economic impact on the United States has so far been limited, the conflict has increased volatility in global energy markets and contributed to renewed inflation concerns. Disruptions or perceived risks to oil supply routes in the Middle East have periodically pushed energy prices higher, complicating the Federal Reserve’s effort to bring inflation back to its long-term target. At this stage, markets appear to be treating the conflict as a manageable risk, but a meaningful escalation could have broader implications for global inflation and growth.

U.S. Economy

2025 started with strong GDP growth but tapered off towards the end. Final U.S. real GDP growth for the year was 2.1%.  By comparison, as of April 1, the Atlanta Fed’s GDPNow model estimates that the first quarter will produce 1.9% annualized GDP growth. As always, these forecasts can change meaningfully as new data arrives, but the broader implication is that growth has likely cooled from last year’s stronger start.

The labor market has posted uneven jobs growth this past quarter. Both January and March posted strong numbers, with 160,000 and 178,000 job gains respectively. February, however, saw 133,000 net jobs lost. Taken together, job growth can best be described as weak but improving after a poor 2025. The unemployment rate is currently 4.3%. 

Inflation also continues to trend in the right direction, though progress on that front remains uneven as well. In February, the Consumer Price Index rose 2.4% year-over-year, while core CPI (excluding food and energy) rose 2.5% year-over-year. Those readings are closer to the Fed’s target than previous years, but it still gives them reason to remain cautious, particularly given the sensitivity of inflation expectations to energy prices and geopolitical developments.

As a result, monetary policy remained on hold during the quarter. In March, the Federal Reserve maintained the federal funds target range at 3.50% to 3.75%, emphasizing that inflation is still “somewhat elevated” while noting that job gains have “remained low” and that uncertainty around the outlook has increased. As of this writing, the CME group shows that Fed rate futures are expecting neither a cut nor a raise for the rest of 2026. 

International Economy

Economic conditions outside the United States remain sluggish, with global growth continuing to run below pre‑pandemic norms amid ongoing geopolitical uncertainty, restrictive financial conditions, and uneven domestic demand in various parts of the world. The International Monetary Fund projects global GDP growth of approximately 3.1% in 2026, with advanced economies growing at roughly 1.5% and emerging market economies near 4.0%, underscoring the growing divergence between regions. 

Geopolitical developments have become a more significant factor in the international outlook during the first quarter. The ongoing conflict involving Iran has introduced renewed volatility into global energy markets, particularly through disruptions to shipping and supply routes in the Middle East. The Strait of Hormuz typically accounts for roughly 20% of global oil and liquefied natural gas flows, and recent disruptions have contributed to higher and more volatile energy prices. Supply risks threaten energy-importing regions like Europe and parts of Asia, increasing inflation and reducing growth if disruptions continue or worsen.

Europe remains one of the weaker areas of the global economy, as growth has remained sluggish. In its most recent projections, the European Central Bank estimates real GDP growth of just 0.9% in 2025 and 1.1% in 2026, reflecting weak business investment and limited external demand. Unfortunately, inflation pressure is now expected to pick back up as well. Standard and Poor has recently increased their 2026 inflation projection for the region to 2.4%.

China’s outlook is also significant to the broader international picture. The World Bank currently estimates Chinese economic growth to have been approximately 4.9% in 2025, slowing to around 4.4% in 2026, as persistent weakness in the property sector, soft household confidence, and slower export growth continue to weigh on activity. Other parts of emerging Asia continue to grow more quickly, but even those economies are expected to experience a decline from recent peaks. 

Markets

The U.S. stock market was volatile during the first quarter. U.S. large-cap equities, as represented by the S&P 500 Index, finished down 4.33% during the quarter. Developed international equity markets, as represented by the MSCI EAFE Index, performed slightly better with a loss of 1.24%. The MSCI Emerging Markets Index finished roughly even, with a decrease of 0.17% as of quarter-end.

Bond returns were also somewhat flat. During the first quarter, the Bloomberg U.S. Aggregate Bond Index was down 0.05%, the Bloomberg Hedged Global Aggregate Bond Index was down 0.15% and the Bloomberg U.S. Inflation-Linked Bond Index was up 0.26%. 

The energy shock led to a big win for commodities during the quarter. The Bloomberg Commodity Index gained 24.41% during the period. Real Estate also performed well. The Wilshire REIT Index was up 4.78%.

Outlook              

The outlook for the remainder of 2026 continues to be shaped by the interaction of three forces:

1. Growth is slowing but not necessarily stalling. Recent GDP numbers suggest continued expansion, though at a reduced pace relative to the first half of 2025
2. Inflation remains stubbornly higher than target.  February’s CPI and core CPI readings show meaningful progress, but the Fed is likely to require additional evidence that inflation is on a stable path toward 2% before considering another cut. 
3. The labor market remains choppy but still positive. The economy’s trajectory may depend on whether slowing hiring stabilizes at a modest pace or deteriorates into broader weakness. 

From an investment perspective, the last 15 months have highlighted the benefits of broad diversification. After extended periods where U.S. equities dominated results, international opportunities seem to have become more compelling as valuation gaps became more attractive. At the same time, fixed income continues to look more attractive than it did during the zero-rate era, as yields provide a solid floor on returns if global economic growth continues to cool.

Geopolitical risks, particularly in the Middle East, remain an additional source of uncertainty and could influence both inflation and growth if conditions deteriorate further.

As always, we recommend a diversified portfolio containing a reasonable amount of equity exposure for any investor with a long enough time horizon.