Newly released data on Friday indicated that the U.S. economy was already on shaky ground even before President Trump steered the nation toward conflict with Iran.
The Commerce Department reported Friday that economic growth at the close of last year was sluggish, hampered by the lengthy government shutdown. Economists generally anticipate that most of these lost gains will be recovered in the present quarter, spanning January through March.
Nonetheless, according to figures for January released Friday, America is still grappling with inflation, a problem likely set to worsen if the Iranian conflict continues to disrupt global energy markets. Shoppers are already noticing higher prices at the pump, which could dampen already weak American economic sentiment.
This confluence of intensifying price pressures and persistent labor market fragility places Federal Reserve policymakers in a difficult spot as they convene in a few days to determine interest rates.
“The full impact of the Iranian conflict on the U.S. economy and financial markets remains highly volatile and uncertain,” stated Kathy Bostjancic, Nationwide’s Chief Economist, in a Friday research note. “The longer these disruptions and conflicts persist, the greater the potential negative blow to business and consumer confidence stemming from mounting uncertainty, leading to further deterioration in economic activity.”
The Big Picture
The U.S. Gross Domestic Product (GDP), the broadest measure of economic output, expanded at an annualized rate of 0.7% between October and December, the Commerce Department disclosed Friday in its second estimate. This marks a significant drop from the initial 1.4% reading and is substantially slower than the 4.4% pace seen in the third quarter.
The latest estimate revised several output categories downward, encompassing exports, consumer spending, and government expenditures. The steepest reduction was seen in exports, which fell to -3.3%, considerably lower than the -0.9% figure cited in the first assessment.
The government shutdown remained the principal drag on Q4 GDP, subtracting 1.16 percentage points. A broad consensus among economists holds that the bulk of these losses will be recovered in the current quarter, which runs from January through the end of March.
“The sharp GDP decline is an omensome check before this energy crisis, increasing the risk of stagflation,” wrote David Russell, Global Head of Market Strategy at TradeStation, in a research note Friday.
The fourth quarter capped a tumultuous year for the U.S. economy, marked by Trump’s efforts to reshape global trade, while businesses boosted AI investments yet concurrently moderated hiring. The economy grew by only 2.1% across the entirety of 2025—the weakest annual pace since 2020, and prior to that, since 2016.
Now, however, the U.S. economy faces repercussions from Trump’s war against Iran, which has already triggered a steep climb in oil prices, elevating gasoline costs for Americans, with further inflationary pain anticipated should the conflict broaden or endure.
The most recent University of Michigan sentiment survey, released Friday, indicated that the Iran conflict was already beginning to weigh on consumers. Sentiment slipped by about 2% this month to 55.5, based on preliminary figures.
“Interviews conducted prior to the military action in Iran showed sentiment improvement compared to last month, but lower readings observed over the nine days following completely negated those initial gains,” noted Survey Director Joanne Hsu in the release.
Labor Market Remains Shaky
The oil shock arrived against a backdrop of volatility in the U.S. labor market: employers shed 92,000 jobs in February, and the unemployment rate ticked up from 4.3% to 4.4%.
However, new data released Friday by the Bureau of Labor Statistics suggested employers remain eager to bring on more staff, with 400,000 new job openings recorded in January compared to December.
Nonetheless, the pace of separations and layoffs saw a slight increase, rising to 2.1 million in January from 183,000, according to the latest “Job Openings and Labor Turnover Survey” (JOLTS) report.
The softening job market facilitated the Fed’s decision to cut rates three times last year, but if conditions do not deteriorate further, Fed officials may hesitate to reduce rates soon due to the looming threat of price hikes spurred by the escalating Middle East conflict.
The Economy’s Engine Isn’t Hitting the Brakes (or the Gas)
Amid burgeoning concerns regarding job security, American appetite for spending is not accelerating.
A separate Commerce Department report Friday showed that consumer spending in January held steady at 0.4% compared to December, according to Personal Consumption Expenditures (PCE) data. This is critical for the broader economy, as expenditures account for roughly two-thirds of U.S. economic activity.
Revised GDP figures from Friday also revealed that inflation-adjusted consumer spending in Q4 registered at 2%, lower than the previously stated 2.4% growth.
As for inflation, the Fed’s preferred gauge—the PCE price index—showed modest improvement in January. Annually, it climbed 2.8% versus 2.9% in December. On a monthly basis, inflation rose by 0.3%, a slight decrease from December’s 0.4%.
“This will only intensify as the energy shock takes hold,” wrote Sonu Varghese, Chief Macro Strategist at Carson Group, in commentary released Friday. “What is already a major headache for the Federal Reserve will become even larger, and the Fed will likely not cut rates in 2026 and might even start discussing rate hikes later this year.”
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