WASHINGTON (AP) — The U.S. economy was already losing momentum before the Iran war drove oil prices higher, new government data showed Friday, adding to concerns about resilience as households face rising gasoline costs.
The Commerce Department slashed its estimate of fourth-quarter growth to a 0.7% annual rate from an initial 1.4%, citing a sharper-than-expected pullback in consumer spending and a 16.7% drop in federal spending tied to last fall’s 43-day government shutdown. The shutdown alone reduced growth by 1.16 percentage points.
Consumer spending, adjusted for inflation, rose just 0.1% in January, while overall incomes jumped 0.9% due to falling tax withholdings from the 2025 tax-cut law. Yet wage growth has cooled, and lower-income families are accumulating debt at a faster pace.
“Underlying inflation pressures were already rising ahead of the war in the Middle East and are set to intensify,” said Diane Swonk, chief economist at KPMG. Some Federal Reserve officials could even push for a rate hike at the meeting next week, she added, though the central bank is likely to stand pat.
Gasoline prices have climbed to an average $3.63 per gallon nationwide, up from $2.94 a month ago, according to AAA. If sustained, higher fuel costs could absorb much of the windfall from larger-than-usual tax refunds expected in March and April.
The job market also weakened. Companies added fewer than 10,000 jobs per month in 2025, the weakest hiring outside recession years since 2002. Open positions rose to nearly 7 million in January, but overall hiring remained flat, suggesting employer caution possibly linked to uncertainty about artificial intelligence’s impact.
“Following two consecutive strong readings for the second and third quarters, the economy was expected to soften heading into year-end,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “It’s now increasingly clear that the economy not only slowed but stumbled into the finish line.”
Consumer sentiment, measured by the University of Michigan, showed a split in March. “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,” said survey director Joanne Hsu.
For all of 2025, GDP grew 2.1%, down from 2.8% in 2024 and 2.9% the year before. Business investment in artificial intelligence remained a bright spot, rising at a 2.2% pace in the fourth quarter, though that decelerated from 3.2% in the third quarter.
The Dow Jones has fallen for three weeks straight, potentially affecting wealthier households that have supported consumer spending as lower-income families pull back. Mortgage rates have also risen since the conflict began, likely on inflation expectations, further pressuring the housing market, which has been in a slump since 2022.
Friday’s GDP report was the second of three estimates for the fourth quarter. The final figure is due April 9.