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The U.S. economy showed signs of weakening even before the outbreak of the Iran war, according to data released Friday, highlighting vulnerabilities that could be exacerbated by rising energy prices and market uncertainties.
The Commerce Department significantly downgraded its estimate of fourth-quarter economic growth, reporting that the economy advanced at just a 0.7% annual rate from October through December—half the initial estimate of 1.4%. This represents a sharp decline from the robust 4.4% growth in the third quarter of last year.
A major factor in this slowdown was the 43-day government shutdown, which caused federal spending and investment to plummet at a 16.7% rate, reducing fourth-quarter growth by 1.16 percentage points. Consumer spending also weakened, growing at just 2% during the quarter, down from 3.5% in the previous three months.
“Following two consecutive strong readings for the second and third quarters, the economy was expected to soften heading into year-end. It’s now increasingly clear that the economy not only slowed but stumbled into the finish line,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
Recent data shows Americans have saved less in recent months, while lower-income families have accumulated more debt. Consumer spending grew modestly in January, rising 0.4%, but just 0.1% after adjusting for inflation. While incomes increased 0.9% after adjusting for taxes and transfers—partly due to reduced tax withholding from 2025 tax changes—wage growth has been cooling compared to a year ago.
The labor market, once a pillar of economic strength, has also weakened significantly. Companies, nonprofits, and government agencies cut 92,000 jobs last month. Throughout 2025, they added fewer than 10,000 jobs monthly—the weakest hiring outside recession years since 2002. A separate report revealed that while job openings increased to nearly 7 million in January from 6.6 million in December, overall hiring remained essentially unchanged, suggesting employer hesitancy amid economic uncertainty.
The outbreak of the Iran war has further complicated the economic outlook. The University of Michigan’s consumer sentiment survey showed that respondents after February 28, when the U.S. and Israel attacked Iran, expressed much more pessimistic views than those surveyed earlier.
“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,” explained Joanne Hsu, director of the sentiment survey.
Rising gasoline prices present another significant concern. Prices have surged to $3.63 per gallon on average nationwide, up from $2.94 a month ago, according to AAA. This increase could offset the benefits many Americans expected to receive from larger tax refunds due to President Trump’s tax cut law passed last year.
Inflation, already a persistent challenge, may worsen in the coming months. The Federal Reserve’s preferred inflation gauge showed prices rose 2.8% in January from a year earlier, but economists warn this figure could exceed 3.5% in the near future due to rising energy costs.
“Underlying inflation pressures were already rising ahead of the war in the Middle East and are set to intensify,” noted Diane Swonk, chief economist at KPMG. She suggested that some Federal Reserve officials might even consider raising interest rates at their upcoming meeting, though the central bank will likely maintain current rates.
Financial markets have also shown strain, with the Dow Jones declining for three consecutive weeks. This downward trend could impact wealthier households that have helped sustain overall consumer spending as lower-income families pull back.
The housing market faces additional pressure as mortgage rates have been rising since the conflict began, likely reflecting investor expectations of persistent inflation. This could further depress a housing sector that has been struggling since 2022, when mortgage rates began climbing from pandemic-era lows.
For all of 2025, the economy grew 2.1%, solid but down from 2.8% in 2024 and 2.9% in the year before. The Commerce Department will release its final report on fourth-quarter growth on April 9.
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16 Comments
The downgrade to Q4 GDP growth is quite substantial, and suggests the US economy was already facing headwinds before the latest geopolitical tensions. It will be important to see if this softness carries over into 2020.
Definitely. The combination of domestic and external factors could create a perfect storm for the US economy if not managed carefully. Maintaining growth and stability will be a significant challenge.
This is a worrying sign for the US economy. The sharp slowdown in Q4 growth and weakening consumer spending suggest underlying vulnerabilities that could be exacerbated by rising energy prices and market uncertainties. It will be crucial to monitor the economic data in the coming months.
You’re right, the economic outlook is uncertain with the rising tensions in Iran. Higher oil prices could further dampen consumer spending and business investment.
The weakening economic data is certainly concerning, but not entirely surprising given the trade tensions and other uncertainties that have weighed on business and consumer confidence. Resolving these issues should be a top priority for policymakers.
Agreed. Reducing policy uncertainty and restoring confidence will be crucial to support a sustained economic recovery. Careful management of the situation with Iran will also be key in the near-term.
The economic data seems to point to a broader slowdown in the US economy, even before the latest geopolitical tensions. Addressing the underlying vulnerabilities, such as weak consumer spending and policy uncertainty, should be a top priority.
Well said. The economy appears to be on shakier ground than previously thought. Policymakers will need to act decisively to mitigate the risks and support a sustainable recovery.
Interesting that consumer spending growth slowed so significantly in Q4. This could point to broader concerns among households about the economic trajectory. Maintaining consumer confidence will be crucial to sustain the expansion.
That’s a good point. Weak consumer spending is worrying, as it’s a key driver of US economic growth. Policymakers will need to carefully monitor household sentiment and spending patterns.
The sharp decline in Q4 growth is concerning, but not entirely unexpected given the weakening data we’ve seen lately. It will be interesting to see how the economy performs in Q1 with the added pressure of the Iran situation.
Agreed, the economy seems to be on shaky ground heading into 2020. The geopolitical risks from the Iran conflict could further destabilize the outlook.
The government shutdown seems to have had a significant impact on Q4 growth, underlining how political dysfunction can negatively affect the real economy. Policymakers will need to address these structural issues to build a more resilient economy.
That’s an astute observation. Reducing political gridlock and policy uncertainty should be a priority to support a stronger economic recovery.
The sharp slowdown in Q4 GDP growth is a worrying sign, especially with the added pressure of rising oil prices from the Iran conflict. Maintaining a resilient economy will require addressing both domestic and international challenges.
Absolutely. Policymakers will need to take a multi-faceted approach to shore up the economy in the face of these headwinds. Careful coordination of fiscal, monetary, and trade policies will be essential.