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.″