The US economy grew just 0.7% last quarter, ahead of a potentially destabilizing war with Iran
The US Economy Stagnates Amid Rising Inflation and Uncertainty
Recent economic indicators reveal a slowdown in U.S. growth, with the gross domestic product (GDP) expanding at a modest 0.7% annualized rate during the October-December period. This figure, released by the Commerce Department on Friday, reflects a downward revision from the initial 1.4% estimate and lags significantly behind the 4.4% growth recorded in the prior quarter. The revised data highlights challenges in key sectors, including exports, consumer spending, and government expenditures.
Shaky Foundations Before the Iran Conflict
Even prior to the U.S. entering a conflict with Iran under President Donald Trump, the economy faced instability, as highlighted by recent data. The government shutdown in late 2025 had already sapped growth, reducing GDP by 1.16 percentage points. While economists anticipate a recovery in the current quarter—spanning January to March—this rebound may be challenged by lingering inflationary pressures.
Analysts warn that the Iranian conflict is exacerbating price hikes, particularly in energy markets. This has already led to higher fuel costs for consumers, with more upward pressure expected if the war intensifies. “The full impact on the US economy and financial markets from the Iranian conflict remains highly fluid and uncertain,” noted Kathy Bostjancic, chief economist at Nationwide. “The longer the conflict and disruptions persist, the larger the possible negative hit to business and consumer confidence from increased uncertainty that would inflict further drag on economic activity.”
Consumer Sentiment Under Strain
A separate survey from the University of Michigan, released on Friday, underscores the growing unease among consumers. Sentiment dipped by 2% in January, settling at a 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,” explained Joanne Hsu, the survey’s director.
Consumer spending, which had held steady at a 0.4% rate in January, is now facing headwinds. The combination of higher fuel prices and an uncertain labor market has dampened spending, a trend that could worsen as inflationary risks mount. The labor market itself remains volatile, with employers losing 92,000 jobs in February and the unemployment rate climbing to 4.4% from 4.3%.
Fed Policymakers Between a Rock and a Hard Place
Despite the weak job market, the latest Job Openings and Labor Turnover report indicates a mixed picture. While the number of job openings surged to 400,000 in January compared to December, layoffs increased slightly to 2.1 million. These dynamics complicate the Federal Reserve’s decisions, as it balances the need to stimulate growth with concerns over escalating inflation.
“The big downward revision in GDP is a gut check going into this energy crunch, increasing the risk of stagflation,” wrote David Russell, global head of market strategy at TradeStation. The Fed’s previous rate cuts were driven by labor market weakness, but policymakers may hesitate to act if inflation persists due to the Middle East conflict.
