WASHINGTON (AP) – Resilient U.S. economy was already showing signs of strain before the Iran war began, data shows Friday release highlighting the risks posed by rising gasoline and energy prices.
The Commerce Department said the economy barely grew in the last three months of last year, cutting its growth forecast in half for the fourth quarter. Inflation-adjusted consumer spending was weak in January as inflation remained high. Employment has also almost stagnated. A survey of consumer sentiment released Friday also showed Americans’ economic outlook worsened following the U.S.-Israel attack on Iran.
During the war, gasoline prices soared to nearly $4 a gallon, straining the already strained budgets of many households. Many Americans will receive larger-than-usual tax refunds in March and April under President Donald Trump’s tax cut law passed last year, but much or all of that benefit could be wiped out if gas prices continue to rise.
Additionally, the Dow Jones has now fallen for the third straight week, potentially impacting wealthy U.S. households that have supported overall consumer spending as lower-income households pull back on spending.
“Underlying inflationary pressures were already building before the Middle East wars and are likely to intensify going forward,” said Diane Swonk, chief economist at KPMG. He added that some Fed officials may even seek to raise rates at next week’s meeting, but the central bank will likely acquiesce.
Mortgage rates have risen since the conflict began, likely as investors expect inflation to remain high. This could further squeeze the U.S. housing market. I was in a slump Fast forward to 2022, when mortgage rates started rising from their pandemic-era lows.
A 43-day government shutdown last fall also hurt growth late last year. The economy grew at an unexpectedly slow 0.7% annual rate from October to December, according to the Commerce Department. reported on Friday has been significantly downgraded from The initial forecast was 1.4%.
The growth rate of the country’s gross domestic product (the country’s output of goods and services) fell sharply from 4.4% in the third quarter of last year and 3.8% in the second quarter.
Federal government spending and investment plunged 16.7% due to the government shutdown, and growth fell by 1.16 percentage points in the fourth quarter.
“After two consecutive strong second and third quarters, the economy was expected to soften toward the end of the year. It is becoming increasingly clear that the economy has not only slowed, but has stumbled across the finish line,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, said in a comment. “The government shutdown was certainly a big factor in the loss of momentum, but so was the sharp decline in consumption growth.”
Separately, personal consumption grew by a modest 0.4% in January, but after adjusting for inflation, the increase was only 0.1%. Income adjusted for taxes and transfers increased by 0.9% due to a reduction in withholding tax due to the 2025 tax changes. However, wage growth has slowed compared to a year ago.
New data shows Americans are saving less and taking on more debt, especially among low-income households, in the past few months. Weak employment (the economy added little jobs last year) is also weighing on consumer confidence.
Overall sentiment fell only slightly in March, according to the University of Michigan Consumer Sentiment Survey, but the survey was only half completed when the attacks on Iran began. Those who reacted after the war began on February 28 were far more pessimistic.
“Interviews completed before the military action in Iran showed that sentiment had improved since last month, but the decline in numbers seen over the next nine days completely erased any initial gains,” said Joan Hsu, head of sentiment research.
Separately, the Fed’s most closely watched inflation indicator rose 2.8% in January from a year earlier. But economists say that number could rise to more than 3.5% in the coming months, as gasoline prices nationwide average $3.63 per gallon, according to AAA, up from $2.94 a month ago.
The economy grew at a solid 2.1% last year, but down from 2.8% in 2024 and 2.9% the year before.
Personal consumption grew by 2% in the fourth quarter, down from 3.5% in the third quarter and the 2.4% the government had initially expected. Business investment, excluding housing, rose at a steady pace of 2.2%, likely reflecting the infusion of funds into artificial intelligence, but the rate of increase slowed from 3.2% in the third quarter.
The GDP data category, which measures the economy’s strength, was weaker than previously reported, growing 1.9% from 2.9% in the third quarter. This category includes personal consumption and private investment, but excludes volatile items such as exports, inventories, and government spending.
Meanwhile, the U.S. job market is in a slump. Last month, businesses, nonprofits, and government agencies cut 92,000 jobs. Less than 10,000 jobs will be added per month in 2025, the largest non-recession employment decline since 2002.
Friday’s report showed companies posted nearly 7 million jobs in January, a welcome increase from 6.6 million in December. However, the overall hiring landscape remains essentially unchanged, suggesting that companies are reluctant to fill vacancies, perhaps due to uncertainty about the impact of artificial intelligence.
This reluctance could become even stronger if the war drags on and weighs on consumer confidence and spending.
Friday’s GDP was the second of three forecasts for fourth-quarter growth. The deadline for submitting the final report is April 9th.
