Cracks emerged in a resilient US economy before war in Iran sent oil
prices rocketing
[March 14, 2026] By
PAUL WISEMAN and CHRISTOPHER RUGABER
WASHINGTON (AP) — The highly resilient U.S. economy was already showing
signs of strain even before the launch of the Iran war, data released
Friday showed, underscoring the risks that rising gasoline and energy
prices may pose.
The economy barely grew in the final three months of last year, the
Commerce Department said, as it cut its estimate of fourth-quarter
growth in half. Consumer spending, after adjusting for inflation, was
anemic in January, as inflation remained sticky-high. Hiring has also
ground largely to a standstill. And Americans' outlook for the economy
tumbled after the U.S. and Israel attacked Iran, according to a survey
of consumer sentiment also released Friday.
Gasoline prices have raced closer to $4 per gallon during the war,
squeezing many household budgets that are already under pressure. Many
Americans will receive larger-than-usual tax refunds in March and April
because of the passage of President Donald Trump's tax cut law last
year, but higher gas costs, if they persist, could soak up much or even
all of those gains.
What's more, the Dow Jones has now fallen for three weeks straight,
possibly impacting the wealthier U.S. households that have helped prop
up overall consumer spending as lower-income families pull back.
“Underlying inflation pressures were already rising ahead of the war in
the Middle East and are set to intensify,” Diane Swonk, chief economist
at KPMG, said. Some Federal Reserve officials could even push for a hike
in interest rates at its meeting next week, she added, though the
central bank will probably stand pat.
Mortgage rates have been rising since the conflict began, likely because
investors expect inflation will remain high. That could further weigh on
the U.S. housing market, which has been in a slump dating back to 2022,
when mortgage rates began to climb from pandemic-era lows.
Last fall’s 43-day government shutdown also hobbled growth at the end of
last year. The economy advanced at an unexpectedly sluggish 0.7% annual
rate from October through December, the Commerce Department reported
Friday in a big downgrade from its initial estimate of 1.4%.
Growth in gross domestic product — the nation’s output of goods and
services — was down sharply from 4.4% in last year’s third quarter and
3.8% in the second.
Federal government spending and investment, clobbered by the shutdown,
plunged at a 16.7% rate, hacking 1.16 percentage points off
fourth-quarter growth.
“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,” Jim Baird, chief investment officer at Plante
Moran Financial Advisors, said in a commentary. “The government shutdown
was certainly a major factor in the loss of momentum, but a sharp
decline in consumption growth also played a role.″
Separately, consumer spending grew modestly in January, rising 0.4%, but
just 0.1% after adjusting for inflation. Incomes, after adjusting for
taxes and transfers, jumped 0.9% as tax withholding fell because of 2025
tax changes. Yet wage growth has been cooling compared with a year ago.
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A shopper pays with cash for a container of candy at a store,
Thursday, Dec. 11, 2025, in Salem, N.H. (AP Photo/Charles Krupa,
File)
 New data shows that Americans have
saved less in the past few months and lower-income families in
particular have run up more debts. Weak hiring — the economy barely
added jobs last year — has also weighed on consumer confidence.
Overall sentiment only declined slightly in March, according to the
University of Michigan's consumer sentiment, but the survey was only
half completed when the attack was launched on Iran. Those
responding after Feb. 28, the start of the war, were much gloomier.
“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,” Joanne Hsu, director of the sentiment survey, said.
Separately, a measure of inflation closely watched by the Federal
Reserve rose 2.8% in January from a year earlier. Yet that figure
could top 3.5% in the coming months, economists have said, as gas
prices have jumped to $3.63 a gallon on average nationwide, up from
$2.94 a month ago, according to AAA.
For all of last year, the economy grew 2.1%, solid but down from
2.8% in 2024 and 2.9% in the year before that.
In the fourth quarter, consumer spending grew at a 2% clip, down
from 3.5% in the third quarter and the 2.4% the government had
initially estimated. Business investment, excluding housing,
increased at a solid 2.2% pace, likely reflecting money being poured
into artificial intelligence, but the increase was down from 3.2% in
the third quarter.
A category within the GDP data that measures the economy’s
underlying strength came in weaker than previously reported, growing
at a 1.9% clip, down from 2.9% in the third quarter. This category
includes consumer spending and private investment, but excludes
volatile items like exports, inventories and government spending.
Meanwhile, the American job market is in a slump. Last month,
companies, nonprofits and government agencies cut 92,000 jobs. In
2025, they added fewer than 10,000 jobs a month, the weakest hiring
outside recession years since 2002.
A report Friday showed that companies posted nearly 7 million open
jobs in January, a welcome increase from 6.6 million in December.
Yet overall hiring was essentially unchanged, suggesting companies
are reluctant to fill open positions, perhaps because of uncertainty
around the impact of artificial intelligence.
Such reluctance may intensify if the war drags on and weighs on
consumer confidence and spending.
Friday’s GDP was the second of the three estimates of fourth-quarter
growth. The final report is due April 9.
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