Exhibit 1: GDP\u2019s Main Private Demand Components Midrange Even If GDP Isn\u2019t![\"\"](\"https:\/\/www.newsbeep.com\/us\/wp-content\/uploads\/2026\/03\/exhibit-1-coverstory-03-16-2026.ashx.png\"\/)
Source: Federal Reserve Bank of St. Louis, as of 3\/13\/2026.<\/p>\n
As in the first estimate, the big detractor in Q4 was the record-long 43-day government shutdown, which caused federal spending and investment to plunge -16.7% annualized, subtracting -1.2 percentage points from headline GDP growth. Not great for those affected, but that is mostly over now (Department of Homeland Security funding notwithstanding). Like all prior government shutdowns, it didn\u2019t appear to have notable ramifications on the broader private sector economy.<\/p>\n
Besides, as the chart shows, past slowdowns\u2014or even outright headline contractions\u2014aren\u2019t an automatic precursor to further weakening. Prior soft patches in Q1 2022 and Q1 2025, after all, weren\u2019t predictive. But while Q4\u2019s GDP revisions weren\u2019t as severe under the hood, that is all water under the bridge almost three months after the fact.<\/p>\n
So what about Q1? Real PCE, aka consumer spending, rose 0.4% m\/m in January, signaling a good start to the quarter given it comprises more than two-thirds of GDP. (Exhibit 2) But that was January. Could this take a big hit with gas prices up since the Iran conflict erupted at February\u2019s end? We doubt it<\/a>. Gas is only 1.9% of real PCE.[ii]<\/a> And it is still money being spent! The composition could change depending on how higher prices affect volumes sold\u2014and how people substitute. But around half of all vehicle miles driven are for work commutes and shopping (e.g., for daily staples like groceries and other household items). So around half of gas demand is relatively \u201cinelastic\u201d (as economists like to say)\u2014the volumes consumed aren\u2019t likely to change much with price.<\/p>\n Exhibit 2: Spending Doesn\u2019t Always Align With Income, But Growth Is Likely When Both Are Rising Then too, as work-from-home trends show, even if people go out less, that doesn\u2019t mean they won\u2019t spend. Less driving\u2014and gas purchases\u2014can free up folks\u2019 budgets for other items they might have been craving. In this way, PCE is more resilient\u2014and less fragile\u2014than it may seem.<\/p>\n And with real disposable personal income (DPI) also up strongly to start the year, there is plenty left<\/a> in consumers\u2019 tanks in aggregate to keep spending. This is one reason why the Institute for Supply Management (ISM) services purchasing managers\u2019 index hit 56.1 in February. That isn\u2019t only nicely above the 50 mark that indicates more than half of the survey\u2019s responding businesses reported growth, it is the highest level in four years.[iii]<\/a><\/p>\n It is also one reason why the Atlanta Fed\u2019s Q1 GDPNow estimate is running at 2.7% annualized.[iv]<\/a> That may not be exactly where the BEA\u2019s official Q1 GDP ends up. But in general, the estimate becomes more accurate towards the end of the quarter with most data in.<\/p>\n Consumption is all fine and good, but the swing factor for the economy is business investment. A substantial part of that is for durable goods orders for equipment (industrial, transportation and information processing), roughly 39% of capital expenditures.[v]<\/a> Now, durable goods orders, a volatile dataset\u2014and its steadier subset, nondefense capital goods orders excluding aircraft (aka core capital goods orders)\u2014were flat in January. (Exhibit 3) But notice the trends. Durable goods orders have yet to top their May 2025 record high as tariff uncertainty hit and businesses front-ran levies, but January\u2019s level was still higher than any point before that, while January\u2019s core capital goods orders came in just a shade under its December record high.<\/p>\n Exhibit 3: Durable Goods Orders Trending Upward All these data are backward looking, and with the conflict in Iran raging, most expect the economy to weaken from here. But with growth stronger under the hood than many think, we see more potential for upside surprise.<\/p>\n \u00a0<\/p>\n [i]<\/a> Source: BEA, as of 3\/13\/2026.<\/p>\n [ii]<\/a> Source: BEA, as of 3\/13\/2026.<\/p>\n [iii]<\/a> Source: ISM, as of 3\/4\/2026.<\/p>\n [iv]<\/a> Source: Federal Reserve Bank of Atlanta, as of 3\/13\/2026.<\/p>\n![\"\"](\"https:\/\/www.newsbeep.com\/us\/wp-content\/uploads\/2026\/03\/exhibit-2-coverstory-03-16-2026.ashx.png\"\/)
Source: Federal Reserve Bank of St. Louis, as of 3\/13\/2026.<\/p>\n![\"\"](\"https:\/\/www.newsbeep.com\/us\/wp-content\/uploads\/2026\/03\/exhibit-3-coverstory-03-16-2026.ashx.png\"\/)
Source: Federal Reserve Bank of St. Louis, as of 3\/13\/2026.<\/p>\n