The US economy exhibited signs of instability prior to President Donald Trump’s decision to engage in conflict with Iran, as indicated by a series of new data released on Friday. At the conclusion of the previous year, the Commerce Department reported that economic growth was sluggish, hindered by the unprecedented government shutdown. Most economists anticipate that the majority of those losses will be recovered in the ongoing quarter spanning January to March. However, the United States continues to grapple with an inflation issue, as indicated by the January figures released on Friday — a situation that is expected to deteriorate if the conflict in Iran persists in disrupting global energy markets. Consumers are increasingly aware of rising prices at the pump, which is poised to further dampen the already fragile economic sentiment in America. The interplay of escalating price pressures and persistent vulnerabilities in the labor market presents a challenging scenario for Federal Reserve policymakers, who are poised to meet shortly to determine interest rates.
“The full impact on the US economy and financial markets from the Iranian conflict remains highly fluid and uncertain,” stated Kathy Bostjancic. “The prolonged nature of the conflict and disruptions may lead to a significant decline in business and consumer confidence, as heightened uncertainty could impose additional constraints on economic activity.” The Commerce Department reported on Friday that the US gross domestic product, representing the most comprehensive gauge of economic output, grew at an annualized rate of 0.7% during the October-to-December quarter, according to its second estimate. The current figure reflects a significant decline from the previously reported 1.4% rate, indicating a markedly slower growth trajectory compared to the 4.4% observed in the third quarter. The most recent estimate has adjusted several output categories downward, encompassing exports, consumer spending, and government expenditures. The most significant downward adjustment was made to exports, which decreased to -3.3%, a stark contrast to the -0.9% indicated in the initial estimate. The government shutdown remained the primary detractor from GDP in the fourth quarter, reducing it by 1.16 percentage points. It is widely anticipated by economists that the majority of those losses will be recovered in the ongoing quarter, which spans from January to the conclusion of March. “The significant downward revision in GDP serves as a critical assessment ahead of this energy crunch, heightening the risk of stagflation,” David Russell noted in an analyst report Friday.
The fourth quarter concluded a tumultuous year for the US economy, characterized by Trump’s efforts to reshape global trade and a surge in business investments in AI, all while hiring was significantly curtailed. The economy recorded an expansion of only 2.1% in 2025, marking the slowest annual growth rate since 2020, and prior to that, since 2016. The US economy is presently confronting the repercussions of Trump’s conflict with Iran, which has already resulted in a surge in oil prices and increased costs at the gas station for Americans. Further inflationary pressures are anticipated should the conflict escalate or extend over time. The most recent sentiment survey from the University of Michigan, published on Friday, indicated that the conflict in Iran is beginning to impact consumer behavior. Sentiment experienced a decrease of approximately 2% this month, resulting in a preliminary reading of 55.5. “Interviews completed prior to the military action in Iran showed an improvement in sentiment from last month, but lower readings seen during the nine days thereafter completely erased those initial gains,” stated Joanne Hsu. The oil shock occurs amidst a fragile US labor market, characterized by a reduction of 92,000 jobs in February, coinciding with an increase in the unemployment rate to 4.4% from 4.3%.
However, recent data published by the Bureau of Labor Statistics indicates that employers continue to seek additional labor, with 400,000 new job openings recorded in January, in contrast to December. Nonetheless, layoffs and discharges increased marginally, rising by 183,000 to reach 2.1 million in January. The latest Job Openings and Labor Turnover report indicates this information. A weakening labor market prompted the Fed to lower rates three times last year; however, barring any further deterioration in conditions, Fed officials may be reluctant to reduce rates in the near term due to the imminent risk of rising prices stemming from the escalating conflict in the Middle East. Amidst rising apprehensions regarding job security, the willingness of Americans to increase their spending remains subdued. A report released by the Commerce Department on Friday indicated that consumer spending remained stable at a 0.4% rate in January compared to December, based on Personal Consumption Expenditures data. This is significant for the overall economy, as consumer spending accounts for approximately two-thirds of economic activity in the United States.
Friday’s revised GDP data indicated that inflation-adjusted consumer spending in the fourth quarter was 2%, a decrease from the previously reported 2.4% increase. In terms of inflation, the Federal Reserve’s favored measure, the PCE price index, indicated a modest enhancement in January. On an annual basis, it expanded by 2.8%, compared to 2.9% in December. In terms of monthly performance, inflation increased by 0.3%, a slight decrease from the 0.4% recorded in December. “This is only going to head higher as the energy shock comes through,” Sonu Varghese stated in commentary issued Friday. “An already significant challenge for the Federal Reserve is poised to escalate, and it is probable that the Fed will refrain from cutting rates in 2026 and may even begin discussions regarding rate increases later this year.”