Q1 2026 Economic Review

The U.S. economy entered 2026 with a backdrop of uncertainty and carried that theme throughout the first quarter, balancing moderate resilience with persistent structural and geopolitical headwinds.

A Fragile Start: Uncertainty Defines the 2026 Economic Outlook

Policy Shifts and Political Risk Lead to Uncertainty

At the start of the year, economic outlooks were shaped in part by policy uncertainty as President Trump began his second term. Potential impacts from tariffs and proposed tax cuts raised concerns about inflation, federal deficits, and long-term debt levels. Tariffs, in particular, introduced the risk of both higher prices and slower economic growth, while immigration policy changes posed potential constraints on labor force expansion.

Economic Resilience Amid Slowing Momentum

Despite these uncertainties, the economy demonstrated underlying strength. GDP grew 2.3% in Q4 2024, slightly below expectations, but consumer spending remained solid throughout the quarter—even in the face of elevated prices. By February and March, the broader economy reflected a “steady but uneven” trajectory: stable overall, though not especially strong.

Consumer Spending Remains the Backbone of Growth

Consumer behavior remained a key pillar of support. Spending held up, particularly in services such as travel and dining, while consumer confidence improved slightly in February, albeit from relatively low levels. The labor market stayed resilient but cautious, characterized by a “low-hire, low-fire” environment. By March, hiring and wage growth had begun to cool modestly, signaling a gradual normalization rather than deterioration.

Federal Reserve Holds Steady as Rate Cut Expectations Build

Inflation trends evolved gradually over the quarter. While still above the Federal Reserve’s 2% target, inflation showed signs of easing by March. This kept the Fed in a patient, wait-and-see mode, with markets beginning to anticipate potential rate cuts later in the year. At the same time, longer-term inflation risks persisted, particularly from tariffs and rising energy prices.

Yield Curve Normalization and Interest Rate Trends

Interest rates and the yield curve reflected these shifting expectations. The yield curve turned positively sloped early in the quarter, with the 10-year Treasury at 4.52% and the one-year at 4.16% in January. Mortgage rates also edged down slightly to 6.86%. However, rate-sensitive sectors such as housing and manufacturing continued to face pressure, while technology-related industries showed more resilience.

Mortgage Markets Show Early Signs of Life

In mortgage markets, prepayment speeds remained low overall, though activity began to pick up for higher coupon loans above 6%. The secondary market for mortgage servicing rights stayed active but cautious, with pricing reflecting ongoing uncertainty.

Geopolitical Tensions Escalate and Reshape Market Risk

Geopolitical developments played an increasingly significant role as the quarter progressed. Ongoing conflicts—including Russia-Ukraine and Israel-Hamas—continued to weigh on global stability. In February, tensions escalated sharply as the United States, alongside Israel, launched airstrikes against Iranian military and nuclear sites, intensifying already fragile conditions. By March, rising friction involving the U.S. and Iran, combined with broader instability in the Middle East and continued U.S.-China competition, contributed to a more uncertain global backdrop.

Energy markets reflected these dynamics. Oil prices, which began the quarter at $73 per barrel in January and dipped to $67 at the end of February, surged dramatically to $102 per barrel in March. This sharp increase introduced renewed upside risk to inflation and added another layer of complexity to the economic outlook.

Q1 2026 Recap: Stable Growth in an Increasingly Fragile Environment

Overall, Q1 2026 can be characterized as stable but fragile. The U.S. economy remained supported by strong consumer activity and a resilient labor market, but momentum was tempered by policy uncertainty, structural challenges, and escalating geopolitical risks. As the quarter closed, the economy appeared to be holding its ground domestically, while increasingly influenced by global developments that could shape the path forward for the rest of the year.

Why Institutional Investors Are Turning to Data-Driven Valuations

We watch the trends so you don’t have to—delivering the most precise, defensible valuations in the market. See why institutions trust Level1Analytics as their partner.

Learn More