The economy was already struggling before the bombs started falling
Before the first strikes fell on Iran, the American economy was already faltering — a revision to fourth-quarter GDP growth, cut nearly in half to just 0.7%, revealed an economy weakened by shutdown, sluggish exports, and cautious consumers. Now, with oil prices climbing and sentiment souring in the shadow of conflict, the nation finds itself at a familiar and uncomfortable crossroads: growth slowing, prices rising, and the instruments of policy offering no clean remedy. The Federal Reserve, like the economy itself, must navigate between two dangers at once.
- A sharp downward revision to Q4 GDP — from 1.4% to 0.7% — exposed an economy that was already losing momentum before military conflict entered the equation.
- The Iran conflict has sent oil prices surging and consumer confidence sliding, with nine days of military action erasing all the sentiment gains that preceded it.
- The labor market is sending contradictory signals: employers shed 92,000 jobs in February while simultaneously posting 400,000 new openings, leaving workers and analysts alike uncertain of the ground beneath them.
- Inflation is cooling only slightly, and analysts warn that sustained Middle East tensions could reverse that progress sharply and quickly.
- The Federal Reserve, which cut rates three times in 2025, now faces the prospect of holding or even raising rates — a painful pivot that risks choking off what little growth remains.
- The word stagflation — stagnant growth paired with rising prices — has returned to serious economic conversation for the first time in a generation.
The numbers arrived Friday morning, and they told a story of trouble that predated the bombs. The Commerce Department's revised estimate for fourth-quarter GDP growth came in at just 0.7% annualized — nearly half the 1.4% previously reported, and a stark collapse from the 4.4% growth recorded just one quarter earlier. Exports fell harder than expected, consumer spending came in weaker, and a government shutdown alone subtracted more than a full percentage point from growth. The year 2025 closed with the economy expanding just 2.1%, its slowest annual pace since 2020.
What made the timing particularly unsettling was what was happening simultaneously. Even as economists absorbed the GDP revision, the conflict with Iran was already reshaping energy markets and household budgets. Oil prices had spiked. Gas prices were climbing. The University of Michigan's consumer sentiment survey, released the same day, told the human side of the story: a reading of 55.5, down roughly 2%, with the survey director noting that nine days of military conflict had erased all the improvement recorded before the strikes began.
The labor market offered little reassurance. Employers shed 92,000 jobs in February, nudging unemployment to 4.4%. Yet 400,000 new job openings appeared in January, and layoffs ticked upward — a market caught between hiring and cutting, unable to commit to either direction. Consumer spending, which powers roughly two-thirds of the economy, grew just 0.4% in January. Americans were still spending, but carefully, under the weight of uncertainty.
Inflation offered only modest relief. The Federal Reserve's preferred gauge, the PCE price index, grew at 2.8% annually in January — slightly improved, but fragile. Analysts warned that if the Iran conflict continued disrupting global energy supplies, those numbers would move sharply higher, and quickly.
The Federal Reserve now faces what one economist called a migraine in the making. Having cut rates three times in 2025 to support a weakening labor market, policymakers must now weigh whether further cuts are even possible against a rising inflation threat. Rate hikes — once unthinkable — are being discussed as a real possibility later in 2026. The specter of stagflation, that toxic pairing of stagnant growth and rising prices, has returned to serious conversation. The economy has entered a phase where the traditional tools of policy seem inadequate to the moment, and the path forward remains genuinely uncertain.
The numbers came in Friday morning, and they told a story of an economy already struggling before the bombs started falling. The Commerce Department released its revised estimate for fourth-quarter growth, and the picture was grimmer than anyone had initially thought. Gross domestic product expanded at just 0.7% on an annualized basis—a sharp drop from the 1.4% figure reported weeks earlier, and a collapse compared to the 4.4% growth the economy had managed in the third quarter. The revision was broad and painful: exports fell harder than expected, consumer spending came in weaker, government spending disappointed. The biggest culprit was the government shutdown, which had subtracted 1.16 percentage points from growth all by itself. Economists were already penciling in a rebound for the current quarter, but the damage was done. The year 2025 had closed with the economy expanding just 2.1%—the slowest annual pace since 2020.
What made Friday's data release particularly ominous was its timing. Even as the Commerce Department was documenting the economy's weakness, President Trump's conflict with Iran was already reshaping the energy markets and the American wallet. Oil prices had spiked. Gas pumps across the country were showing higher numbers. The University of Michigan's consumer sentiment survey, released the same day, captured the psychological toll: sentiment had declined about 2% to a reading of 55.5. The survey director noted that interviews conducted before the military action had shown improvement, but the nine days of conflict that followed had erased all those gains entirely.
The labor market, meanwhile, remained fragile. Employers had shed 92,000 jobs in February, pushing the unemployment rate up to 4.4% from 4.3%. Yet there were contradictions in the data that suggested employers hadn't entirely given up: 400,000 new job openings had appeared in January. But layoffs and discharges had ticked upward by 183,000, reaching 2.1 million for the month. It was a labor market caught between signals—still hiring, but also still cutting.
Consumer spending, the engine that drives roughly two-thirds of the American economy, was barely turning over. In January, personal consumption expenditures grew at just 0.4% from the previous month. The revised fourth-quarter data showed that inflation-adjusted consumer spending had grown 2% for the quarter, lower than the 2.4% previously reported. Americans were spending, but cautiously, and the weight of uncertainty was pressing down.
Inflation, the other half of the economic squeeze, showed only modest improvement. The Federal Reserve's preferred inflation gauge, the PCE price index, grew at 2.8% annually in January, down slightly from 2.9% in December. On a monthly basis, inflation was up 0.3%, compared to 0.4% the month before. The numbers suggested the inflation problem was stabilizing—but only for now. Analysts were nearly unanimous in their warnings: if the Iran conflict persisted and continued to disrupt global energy supplies, those inflation numbers would move sharply higher.
The Federal Reserve faced an impossible choice. In just days, policymakers would convene to set interest rates. They had cut rates three times in 2025 as the labor market weakened, but the inflation threat from the Middle East conflict made further cuts unlikely. Kathy Bostjancic, chief economist at Nationwide, captured the uncertainty in a note to clients: the full impact of the Iranian conflict on the American economy remained fluid and unknowable. The longer it lasted, the greater the damage to business and consumer confidence. David Russell, global head of market strategy at TradeStation, was blunter: the big downward revision in GDP was a gut check heading into an energy crisis, and it raised the specter of stagflation—the toxic combination of stagnant growth and rising prices that had plagued the economy in decades past.
Sonu Varghese, chief macro strategist at Carson Group, saw the trajectory clearly. The energy shock was coming, he wrote, and it would only push inflation higher. The Federal Reserve's already substantial headache was about to become a migraine. Rate cuts seemed off the table for 2026. Rate hikes, once unthinkable, were now being discussed as a real possibility later in the year if conditions deteriorated further. The economy had entered a new and uncertain phase, one where the traditional tools of policy—lower rates to stimulate growth, higher rates to fight inflation—seemed equally inadequate to the moment.
Citações Notáveis
The full impact on the US economy and financial markets from the Iranian conflict remains highly fluid and uncertain. The longer the conflict and disruptions persist, the larger the possible negative hit to business and consumer confidence.— Kathy Bostjancic, chief economist at Nationwide
The big downward revision in GDP is a gut check going into this energy crunch, increasing the risk of stagflation.— David Russell, global head of market strategy at TradeStation
A Conversa do Hearth Outra perspectiva sobre a história
Why does a 0.7% growth rate matter so much? Isn't some growth still growth?
It matters because it shows the economy is barely moving. That's the difference between a car rolling downhill and one that's stalled. And it was revised down sharply—from 1.4%—which means the initial picture was misleading. People and markets react to corrections like that.
The government shutdown caused 1.16 percentage points of that loss. So without it, wouldn't growth have been closer to 2%?
Yes, and economists are betting most of that will come back in the current quarter. But the shutdown is a symptom, not the disease. The underlying economy—exports, consumer spending—was already weak. The shutdown just made it visible.
You mentioned the labor market is fragile. But there are 400,000 job openings. That sounds healthy.
It's contradictory. Yes, there are openings, but employers are also laying off and discharging workers at higher rates. It suggests uncertainty—companies are hedging, hiring in some places while cutting in others. That's not confidence.
The Iran conflict is new. How much of this slowdown is actually because of that?
Almost none of the GDP slowdown. The fourth quarter ended in December, before the major military action. But the conflict is the new variable now. It's already pushing oil prices up and eroding consumer sentiment. That's the forward-looking threat.
So the Fed is stuck. They can't cut rates because of inflation, but the economy is weak.
Exactly. They cut three times last year when the labor market looked bad. But now inflation is creeping back up because of energy prices, and growth is anemic. There's no good move. Rate cuts risk making inflation worse. Holding steady means no relief for a weakening economy.
What happens if the Iran conflict gets worse?
Inflation accelerates, confidence falls further, and the Fed probably has to consider raising rates despite weak growth. That's stagflation—the worst of both worlds. It's what analysts are warning about.