Guotai Haitong Securities has released a research report characterizing the first-quarter US economy as exhibiting a "K-shaped" pattern with a slightly widening gap, yet the entire "K" is shifting upward, demonstrating a trend of "inflation without stagnation." A key unexpected finding is that the US economic recovery has developed a higher tolerance for interest rates, implying that the floor for US Treasury yields has also risen. The main points from Guotai Haitong Securities are as follows:
In Q1 2026, the US real GDP grew at an annualized quarter-over-quarter rate of 2.0% (compared to a previous 0.5%), showing strong resilience despite high oil prices. This resilience stems from two factors: robust continued growth in AI investment, with quarterly investment annualizing at 8.7%, led by impressive growth in information processing equipment, software investment, and R&D spending; and a significant boost in government consumption and investment, annualizing sharply higher due to expenditures postponed from Q4 2025 because of a government shutdown.
US government revenue and expenditures grew year-over-year by 6.8% and 2.9% respectively in the quarter, lowering the fiscal deficit rate to 5.1%. However, with interest expenses remaining elevated, government debt continued to grow rapidly, with the debt-to-GDP ratio reaching 119%, nearing the 120% threshold.
Consumer spending growth moderated, partly reflecting the dampening effect of high oil prices, particularly on middle- and low-income groups. This was evident in a sharper decline in goods consumption compared to resilient services consumption. Within goods, non-durable goods fell more significantly, while durable goods spending remained flat.
Spurred by the AI investment boom, import growth was substantial. The trade deficit in AI-related goods widened rapidly to $554 billion, up 19% quarter-over-quarter, which acted as a drag on GDP calculations.
Core GDP growth remained steady. The "core GDP" figure, which excludes net exports, inventory changes, and government spending (and better represents underlying real demand from consumption and fixed asset investment), rebounded to an annualized quarter-over-quarter rate of 2.5% in Q1 (up from 1.8% previously).
The convergence of the "K-shaped divergence" was hampered by Middle East conflicts. This is evident in three areas: while AI investment surged, residential investment growth declined; core retail sales growth recovered, yet consumer confidence failed to stabilize; and the gap in job growth between interest-rate-sensitive sectors (including mining, construction, manufacturing, retail, and accommodation/food services) and overall non-farm payrolls showed no significant narrowing.
The Q1 data indicates that the economic recovery's sensitivity threshold to interest rates has increased. Although the convergence of the K-shaped divergence was delayed, high oil prices did not completely halt the process. This was particularly noticeable in early to mid-April: as the 10-year Treasury yield retreated from a high of 4.4% to 4.25%, the 30-year fixed mortgage rate dropped from 6.46% to 6.23%. The loan spread exhibited strong downward momentum amid expectations of eased conflicts, leading to a noticeable rebound in US home purchase and refinancing activity during that period.
These developments signal a critically important shift: the US economic recovery is now less sensitive to interest rate levels, meaning the floor for Treasury yields is higher. The US economy is not experiencing stagflation but rather "inflation without stagnation." Consequently, even a traditionally dovish Fed official acknowledged that the inflation trajectory had become "slightly less optimistic" even before the Iran-related conflict pushed global oil prices higher, and subsequently revised down their forecast for the number of rate cuts.
A fitting description for the overall Q1 US economic performance is that the gap in the "K" widened slightly, but the entire "K" pattern moved upward. The crucial factor is maintaining harmony between the upper and lower parts of the "K." If the upper part rises too rapidly while the lower part lags, high interest rates could begin to suppress the traditional economy and employment, at which point "stagnation" would become the primary concern.
Risks highlighted include the potential for Middle East geopolitical tensions to drive oil prices even higher, and the possibility that market volatility could increase depending on the implementation pace of balance sheet reduction policies advocated by the new Federal Reserve Chair.
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