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
Recent economic data revealed a fragile performance in the final months of 2025, as the country grappled with the consequences of President Donald Trump’s decision to engage Iran in conflict. The Commerce Department’s latest report, released Friday, highlighted that GDP growth in the October-through-December period amounted to 0.7%, a marked slowdown from the initial 1.4% estimate and significantly below the 4.4% growth recorded in the third quarter.
Despite this, analysts believe the economic slump from the previous quarter may be reversed in the current one, spanning January to March. However, inflation continues to challenge the economy, with January figures showing persistent upward pressure on prices. If the war escalates, this trend could intensify, further complicating economic stability.
“The full impact on the US economy and financial markets from the Iranian conflict remains highly fluid and uncertain,” noted Kathy Bostjancic, chief economist at Nationwide. “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.”
Revisions to the GDP report adjusted several components downward, including exports, which fell to -3.3%, compared to the earlier -0.9%. The government shutdown in late 2025 remained the primary factor reducing economic output, subtracting 1.16 percentage points from the fourth quarter’s growth. Yet, economists anticipate a rebound in the coming months, driven by renewed business activity and consumer spending.
Consumer confidence has also been affected by rising fuel prices, which have heightened unease about the economy’s trajectory. A survey from the University of Michigan, released Friday, indicated a 2% drop in sentiment this month, with a reading of 55.5. The report emphasized that pre-war optimism was swiftly overshadowed by post-conflict uncertainty, eroding initial gains.
Meanwhile, the labor market continues to show signs of strain. February saw a net loss of 92,000 jobs, pushing the unemployment rate to 4.4% from 4.3%. However, the Bureau of Labor Statistics reported 400,000 job openings in January, suggesting ongoing hiring demand. Layoff numbers also increased slightly, reaching 2.1 million in January.
“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, the survey’s director, in a statement.
The economic slowdown is compounded by the oil price surge linked to the Middle East conflict, which has already raised costs for American consumers. With inflationary pressures mounting and job market instability persisting, the Federal Reserve faces a challenging decision as it prepares to set interest rates. While the labor market’s weakening could justify rate cuts, rising prices may prompt caution, leaving policymakers in a precarious balancing act.
