U.S. Economy Showed Signs of Strain Even Before Iran Conflict, New Data Suggests

The U.S. economy was already losing momentum and grappling with persistent inflation before geopolitical tensions with Iran sent shockwaves through global oil markets. Newly revised economic data indicates that sluggish growth and stubbornly high prices were taking hold in late 2025—raising concerns about a potential stagflationary environment just as energy costs begin climbing again.

Economic Growth Revised Sharply Lower

Updated figures for the fourth quarter of 2025 show the U.S. economy grew at an annualized rate of just 0.7%, according to revised government estimates. That is significantly weaker than the 1.4% growth rate initially reported.

A key underlying measure of economic strength—real final sales to private domestic purchasers, which tracks consumer spending and private investment—also came in weaker than previously estimated. The metric rose at a 1.9% annual rate, a downward revision of half a percentage point.

The revisions suggest the U.S. economy entered 2026 with far less momentum than policymakers had assumed.

Inflation Remains Elevated

At the same time, inflation pressures remain stubbornly high.

Data released by the Commerce Department shows that the core Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve’s preferred inflation gauge, rose 3.1% in January compared with a year earlier. Core PCE excludes volatile food and energy prices and is closely monitored by policymakers.

Inflation has been gradually climbing since hitting 2.7% in October.

Looking at shorter-term trends, the core index rose at a 3.7% annualized pace over the past three months—nearly double the Federal Reserve’s long-term 2% inflation target.

While the numbers largely matched economists’ expectations, the timing is troubling. The data reflects inflation before energy prices surged following the Iran conflict.

Oil Shock Could Worsen Inflation

Economists say the spike in oil prices tied to Middle East tensions could amplify inflation pressures in the months ahead.

Kathy Bostjancic, chief economist at Nationwide, warned that higher fuel and energy costs will likely ripple through the broader economy.

“The inflation trajectory will only steepen in the coming months,” Bostjancic wrote in a research note, citing surging prices for gasoline, diesel, and fertilizer since the conflict escalated.

She added that the second quarter could see a combination of higher inflation and weaker economic activity driven by rising energy costs, declining exports as global supply chains face disruption, and declining business confidence.

Consumers Are Pulling Back

Consumer spending—the engine of the U.S. economy—was already showing signs of slowing before energy prices began rising.

Inflation-adjusted personal consumption expenditures increased only 0.1% in January, the same modest pace recorded in December.

Meanwhile, the personal saving rate climbed to 4.5%, up half a percentage point from the previous month. The increase suggests households are becoming more cautious and choosing to save more of their income rather than spend it.

That shift represents a notable reversal from much of 2025, when Americans were gradually dipping into savings to sustain spending.

Federal Reserve Faces a Difficult Choice

The current economic backdrop leaves the Federal Reserve in a challenging position.

President Donald Trump has been pushing for interest rate cuts, and his nominee for Federal Reserve chair, Kevin Warsh, has indicated support for lowering borrowing costs.

However, reducing rates risks fueling inflation that is already running above target. On the other hand, maintaining high rates—or raising them further—could suppress economic growth even more.

The combination of weak growth and persistent inflation is precisely the scenario policymakers typically try to avoid.

AI Investment Seen as a Potential Bright Spot

One possible source of strength for the economy is the surge in artificial intelligence investment, with major technology companies pledging trillions of dollars toward new data centers, chips, and infrastructure.

Yet economic data from late 2025 suggests that AI-related spending has not yet significantly boosted overall growth. Analysts say that underscores how fragile the broader economy could be without that investment wave.

Labor Market Shows Early Signs of Stability

Despite the economic headwinds, the U.S. labor market has shown some resilience entering 2026.

The Labor Department reported that job openings rose by 396,000 in January, reversing much of the decline recorded in the final months of 2025. The job openings rate increased to 4.2%, up from 4% in December.

Hiring rates and voluntary quits remained stable, indicating employers are still adding workers and employees are maintaining confidence in the job market.

Additionally, layoffs and involuntary job separations declined slightly, suggesting businesses are not yet pulling back aggressively on staffing.

Still, some signs of weakness have begun to emerge. The government’s monthly employment report showed strong hiring in January but more negative signals beginning to appear in February.

Outlook Remains Uncertain

Economists will be closely watching upcoming labor market data to determine whether the resilience seen in January continues or whether slowing growth and rising energy prices begin to weigh more heavily on employment.

Laura Ullrich, an economist at Indeed Hiring Lab, described the increase in job openings as a brief moment of relief in an otherwise uncertain environment.

“The uptick in job openings represents a small chance to exhale,” Ullrich said, “for a market that otherwise continues to hold its breath amid ongoing volatility and uncertainty.”

Conclusion

The latest economic data paints a picture of an economy already under pressure before global energy markets were disrupted. With growth slowing, inflation remaining elevated, and oil prices climbing due to geopolitical tensions, the months ahead could test both policymakers and consumers as the U.S. navigates an increasingly uncertain economic landscape.

Ernest Hemingway

“Lifelong entrepreneur. Total writer. Internet ninja. Analyst. Friendly music enthusiast.”