US Economic Slowdown and the Impact of the Iran War

Washington D.C. – The U.S. Economy exhibited signs of strain even before the recent escalation of conflict in the Middle East, with growth slowing significantly in the final quarter of 2025. Rising energy prices stemming from the war in Iran are poised to exacerbate existing economic pressures, potentially hindering a full recovery.

Economic Growth Slows Sharply

The U.S. Economy grew at an annual rate of just 0.7% from October through December, a substantial downgrade from the initial estimate of 1.4%, according to the Commerce Department . This marks a significant deceleration from the 4.4% growth experienced in the third quarter and 3.8% in the second. For the entirety of 2025, GDP growth reached 2.1%, down from 2.8% in 2024 and 2.9% in 2023.

Factors Contributing to the Slowdown

Several factors contributed to the economic deceleration. A 43-day government shutdown last fall significantly hampered federal spending and investment, reducing fourth-quarter growth by 1.16 percentage points. Consumer spending, although still growing, slowed to a 2% clip, down from 3.5% in the previous quarter. Business investment, boosted by artificial intelligence spending, increased by 2.2%, but also represented a decline from the 3.2% growth seen in the third quarter. Exports also fell, decreasing by 3.3%.

Impact of the Iran War and Rising Oil Prices

The outbreak of war in Iran has introduced a new layer of economic uncertainty. Gasoline prices have surged, nearing $4 per gallon nationwide, placing additional strain on household budgets . While many Americans are receiving larger tax refunds due to the 2025 tax cuts, these gains could be offset by higher energy costs. The Dow Jones Industrial Average has also experienced a three-week decline, potentially impacting wealthier households and overall consumer spending.

Inflation and Federal Reserve Policy

Underlying inflationary pressures were already rising before the conflict in the Middle East and are expected to intensify. Economists predict that inflation could surpass 3.5% in the coming months, driven by rising gas prices. The Federal Reserve may consider raising interest rates at its next meeting, whereas a rate hike is not certain. Mortgage rates have already begun to climb, potentially further weakening the housing market, which has been in a slump since 2022.

Labor Market Weakness

The American job market is showing signs of weakness. Companies cut 92,000 jobs last month, and job growth in 2025 was the slowest outside of recession years since 2002. While job openings remain relatively high, companies appear hesitant to fill positions, possibly due to uncertainty surrounding the impact of artificial intelligence and the ongoing geopolitical instability.

Shipping Crisis Concerns

The potential closure of the Strait of Hormuz and renewed Houthi attacks on the Suez Canal pose a significant threat to global trade. These disruptions could compromise roughly one-third of global seaborne crude trade, potentially leading to a severe shipping crisis and a global recession .

Looking Ahead

The U.S. Economy faces a challenging outlook. The combination of a pre-existing slowdown, rising energy prices, and geopolitical uncertainty creates a complex economic environment. The final estimate of fourth-quarter GDP will be released on April 9th, providing further insight into the state of the economy.