US Economy Stumbles Pre-War, Inflation Risks Rise

The Commerce Department downgraded its initial estimate of Q4 growth from 1.4% to 0.7% annually, a sharp decline from 4.4% in Q3. Inflation-adjusted consumer spending rose only 0.1% in January, while hiring largely stalled, with companies adding fewer than 10,000 jobs monthly in 2025 and cutting 92,000 jobs last month. The Iran war intensified these pressures, pushing gasoline prices closer to $4 per gallon, up from $2.94 to $3.63 nationwide, according to AAA.

This squeezes household budgets, offsetting larger tax refunds from President Donald Trump’s tax cut law. The Dow Jones has fallen for three consecutive weeks.

KPMG Chief Economist Diane Swonk stated underlying inflation pressures were already rising and are set to intensify, prompting some Federal Reserve officials to push for an interest rate hike. Mortgage rates have also climbed since the conflict began, further weighing on the housing market.

Jim Baird, Chief Investment Officer at Plante Moran Financial Advisors, noted the economy "stumbled into the finish line," attributing the loss of momentum to a 43-day government shutdown and a sharp decline in consumption growth. The University of Michigan’s consumer sentiment survey revealed a gloomier outlook among respondents after the war began on February 28.

A key inflation measure watched by the Federal Reserve rose 2.8% in January, with economists predicting it will top 3.5% in coming months. Overall, the economy grew 2.1% in 2024.