Cracks Emerged in Resilient US Economy Before Iran war Sent Oil Prices Rocketing/ Newslooks/ WASHINGTON/ J. Mansour/ Morning Edition/ New economic data shows the U.S. economy was already losing momentum before the Iran war drove oil prices higher. Sluggish growth, weak hiring and declining consumer confidence were emerging in late 2025 and early 2026. Rising gasoline prices and geopolitical tensions could intensify pressure on households and the broader economy.
US Economy Slowdown Quick Looks
- U.S. economic growth slowed to 0.7% in the fourth quarter of 2025.
- Consumer spending weakened and inflation remained elevated.
- The labor market stalled with minimal job growth in 2025.
- The Iran war has pushed gas prices closer to $4 per gallon.
- Mortgage rates are rising, threatening the housing market recovery.
- Consumer confidence dropped sharply after the war began.
- Economists warn inflation pressures may increase further.
Deep Look
US Economy Showing Signs of Strain Before Iran War
New economic data suggests that the U.S. economy was already beginning to lose momentum before the outbreak of the Iran war pushed energy prices sharply higher.
Reports released Friday showed several warning signs across the economy, including weak growth, slowing hiring, declining consumer confidence and stubbornly high inflation.
The developments highlight the potential risks facing the economy as rising oil prices linked to the conflict in the Middle East put additional pressure on households and businesses.
Growth Slowed Sharply Late Last Year
The Commerce Department reported that economic growth slowed significantly in the final months of 2025.
Gross domestic product (GDP), the broadest measure of economic activity, expanded at just 0.7% annual growth between October and December.
That figure represents a sharp downgrade from the government’s earlier estimate of 1.4% growth and a steep decline from the 4.4% expansion recorded in the third quarter.
The slowdown marked a significant shift from the stronger growth seen earlier in the year.
For the full year, the U.S. economy grew 2.1% in 2025, down from 2.8% in 2024 and 2.9% in 2023.
Government Shutdown Hurt Economic Activity
Part of the economic slowdown stemmed from the 43-day federal government shutdown last fall.
The shutdown led to a steep drop in federal spending and investment, which fell at an annual rate of 16.7% during the fourth quarter.
Economists estimate the decline in government spending alone reduced overall economic growth by more than one percentage point.
Consumer Spending Losing Momentum
Consumer spending — the largest driver of the U.S. economy — also showed signs of weakening.
In January, spending increased 0.4%, but after adjusting for inflation the gain was only 0.1%, indicating modest real growth.
Household incomes rose during the month, partly because tax withholding fell after the passage of new tax cuts last year.
However, wage growth has been slowing compared with previous years.
Many households, particularly lower-income families, have also been dipping into savings or increasing debt to maintain spending.
Inflation Remains Stubborn
Inflation pressures have also remained elevated.
A key inflation measure closely watched by the Federal Reserve rose 2.8% in January compared with a year earlier.
Economists warn the figure could climb above 3.5% in the coming months as rising oil prices push up transportation and energy costs.
Gasoline prices have already jumped significantly since the Iran conflict began.
According to AAA, the average price of gasoline nationwide has risen to about $3.63 per gallon, up from $2.94 just a month earlier.
Some analysts warn prices could approach $4 per gallon if energy markets remain disrupted.
Consumer Confidence Drops
Consumer confidence has also deteriorated following the start of the war.
A survey from the University of Michigan found that Americans’ outlook for the economy weakened sharply after the U.S. and Israel launched attacks on Iran.
Responses collected before the conflict showed improving sentiment compared with the previous month.
However, interviews conducted after the war began revealed a dramatic decline in optimism.
“The initial gains in sentiment were completely erased,” said Joanne Hsu, director of the survey.
Labor Market Losing Momentum
The labor market has also shown signs of slowing.
Employers cut 92,000 jobs last month, while hiring throughout 2025 averaged fewer than 10,000 new jobs per month.
That represents the weakest pace of hiring outside recession periods since 2002.
Even though companies posted nearly 7 million job openings in January, hiring has not increased significantly.
Economists say many companies may be delaying hiring decisions due to uncertainty about economic conditions and the growing use of artificial intelligence technologies.
Housing Market Faces Pressure
Rising interest rates are also creating challenges for the housing market.
Mortgage rates have increased since the war began, partly because investors expect inflation to remain elevated.
The housing sector has already struggled in recent years as borrowing costs climbed from the historic lows seen during the pandemic.
Higher mortgage rates could further reduce home sales and construction activity.
Markets React to Economic Uncertainty
Financial markets have also shown signs of concern.
The Dow Jones Industrial Average has fallen for three consecutive weeks, reflecting investor worries about slowing economic growth and rising energy prices.
Market declines can reduce household wealth, particularly among higher-income families who hold large stock portfolios.
Those households have played an important role in supporting consumer spending during the economic recovery.
Risks Ahead
Economists warn that the economic outlook could worsen if the conflict in the Middle East continues to disrupt energy markets.
“Underlying inflation pressures were already rising ahead of the war,” said Diane Swonk, chief economist at KPMG.
She added that rising energy costs could push inflation higher and potentially influence Federal Reserve policy decisions.
Some central bank officials may consider raising interest rates again if inflation accelerates.
Final GDP Estimate Still Pending
Friday’s report represents the second estimate of fourth-quarter GDP growth.
The Commerce Department will release the final estimate on April 9, which may further revise the figures as more economic data becomes available.
For now, economists say the latest reports suggest the U.S. economy entered 2026 with weakening momentum — even before the additional pressures created by rising oil prices and global conflict.
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