WASHINGTON — The US economy was already under pressure before President Donald Trump’s military action against Iran, new data released Friday shows, with growth slowing and inflation concerns mounting.
The Commerce Department reported that gross domestic product (GDP) expanded at an annualized rate of 0.7% in the fourth quarter of 2025, revised down from the previously reported 1.4%. Exports, consumer spending, and government outlays were all adjusted lower, with exports showing the steepest drop at -3.3%. The historic government shutdown contributed significantly, subtracting 1.16 percentage points from growth.
Economists expect many of these losses to be partially recovered in the current January-to-March quarter, but rising energy costs tied to the Iran conflict could further strain the economy.
Inflation and consumer sentiment
January data indicates that inflation remains a concern. While the PCE price index — the Federal Reserve’s preferred measure — showed a slight slowdown to 2.8% year-over-year, rising fuel costs linked to the Middle East conflict could push prices higher.
Consumer confidence has already been impacted. A preliminary University of Michigan sentiment survey showed a 2% decline in March to 55.5, reflecting anxiety over rising prices and the geopolitical uncertainty.
Labor market remains fragile
The US labor market shows mixed signals. Employers shed 92,000 jobs in February, pushing the unemployment rate up to 4.4%, yet job openings remain high at 400,000 in January. Layoffs increased slightly, totaling 2.1 million, suggesting continued fragility in workforce stability.
Spending and economic outlook
Despite these headwinds, consumer spending held steady at 0.4% in January, and inflation-adjusted spending in Q4 rose 2%, below the previously reported 2.4%. Economists warn that without significant growth in household income, the combination of rising prices and uncertainty could depress spending in the months ahead.
Analysts note that the Federal Reserve faces a difficult balancing act: stimulating growth amid slowing activity while controlling inflation as energy prices rise. Many predict the Fed will hold rates steady in 2026, with potential rate hikes if inflation accelerates due to the energy shock.
“The full impact on the US economy from the Iran conflict remains highly fluid and uncertain,” said Kathy Bostjancic, chief economist at Nationwide. “The longer the conflict persists, the larger the negative hit to business and consumer confidence.”
The revised GDP data highlights how stagnant growth, inflation pressures, and a fragile labor market are converging, leaving policymakers to navigate a turbulent economic landscape amid escalating geopolitical tensions.