The US economy grew just 0.7% last quarter, ahead of a potentially destabilizing war with Iran
The US economy grew just 0.7% last quarter, ahead of a potentially destabilizing war with Iran
New data released Friday highlights the U.S. economy’s fragile state, with growth slowing to 0.7% in the final three months of 2025. This marks a sharp decline from the initial 1.4% estimate and lags behind the 4.4% expansion recorded in the third quarter. The Commerce Department’s second revision revealed downward adjustments across several key sectors, including exports, consumer spending, and government expenditures.
Government shutdown and Iran conflict weigh on economic momentum
The U.S. economic expansion was further strained by the historic government shutdown, which shaved 1.16 percentage points from GDP. While analysts anticipate most of these losses will be recovered in the current quarter, the ongoing Iran conflict introduces new risks. Rising oil prices have already begun to pressure consumers, with inflation expected to intensify if the war disrupts global energy markets.
“The full impact on the U.S. economy and financial markets from the Iranian conflict remains highly fluid and uncertain,” said Kathy Bostjancic, chief economist at Nationwide, in an analyst note. “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.”
The fourth quarter concluded a year of economic turbulence, marked by President Trump’s efforts to reshape trade policies and businesses accelerating AI investments while slowing hiring. The 2.1% annual growth in 2025 was the weakest pace since 2020, and the slowest since 2016. Now, the Iran war adds to the strain, with oil prices surging and fuel costs climbing for American households.
Consumer confidence declines amid inflation fears
The University of Michigan’s latest sentiment survey, released Friday, revealed a 2% drop in consumer confidence this month. The reading fell to 55.5, signaling growing unease about rising prices. Joanne Hsu, the survey’s director, noted that pre-war optimism was quickly reversed, as post-conflict data erased earlier gains.
“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,” Hsu explained in a release.
Consumer spending, which remained flat at a 0.4% rate in January, underscores the challenge of maintaining economic vitality. With job losses and higher prices converging, the Federal Reserve faces a dilemma in balancing rate cuts with inflationary pressures.
Labor market shows mixed signals
Employers reported a 92,000 job reduction in February, pushing the unemployment rate to 4.4% from 4.3%. However, the Bureau of Labor Statistics’ latest report suggests a shift in hiring dynamics, with 400,000 new job openings in January compared to December. Despite this, layoffs increased by 183,000 to 2.1 million, indicating persistent instability in the labor sector.
