World
US Economy Grows 2% Despite Iran War Oil Shock, But Risks Loom
The US economy continued to show resilience in the first three months of 2026, expanding at a solid 2 percent annual rate even as the war with Iran triggered a sharp rise in global energy prices. The Commerce Department’s first estimate of gross domestic product for the quarter, released on Thursday, offered the initial official look at how the economy performed as the conflict in the Middle East began to ripple through fuel costs and business decisions.
While rising energy prices did dampen growth somewhat, private investment, consumer spending, and government expenditures remained relatively strong during the period.“On net it’s a solid number. Consumer spending has held up,” said Jason Draho, head of asset allocation for the Americas at UBS. However, he cautioned that this strength “could be fully offset” if higher energy prices persist for the next six months.
The effective closure of the Strait of Hormuz has sent oil prices soaring more than 60 percent since late February. Brent crude, the global benchmark, has climbed from around $70 a barrel before the war to as high as $120 a barrel this week. Contracts for July and August delivery have topped $100 a barrel in recent days. Consumer spending, which makes up roughly 70 percent of the US economy, grew by 1.6 percent in the first quarter. A broader measure that includes both consumer spending and private investment rose 2.5 percent, up from 1.8 percent in the final quarter of 2025. Much of that strength came from continued heavy business investment in artificial intelligence infrastructure.
Diane Swonk, chief economist at KPMG, noted that the current environment echoes the early post-pandemic period, where solid underlying growth was partly masked by high prices eating into people’s purchasing power.Separate data released Thursday showed that the Federal Reserve’s preferred inflation gauge — the Personal Consumption Expenditures (PCE) price index — rose 0.7 percent in March and 3.5 percent from a year earlier. That was the fastest year-over-year increase since 2023. Even “core” inflation, which strips out volatile food and energy prices, remained elevated at 3.2 percent.
The Federal Reserve held interest rates steady on Wednesday, citing the need to monitor the potential inflationary impact of the oil shock and last year’s tariffs. Despite the economic data showing continued expansion, consumer sentiment has plunged to near record lows. The University of Michigan’s consumer sentiment index hit its lowest level in April, falling below even recession-era readings.
Economists say there is a growing disconnect between headline growth numbers and how many Americans are actually feeling. While unemployment remains relatively low and most households can still pay their bills, the sharp rise in gas and energy prices is creating real anxiety and squeezing budgets, especially for middle- and lower-income families.
Aaron Seyedian, founder of Well-Paid Maids, a cleaning service that pays above-average wages, said his business has remained strong because it serves a wealthier clientele less affected by rising costs. “I feel like I’ve heard scares like this before,” he said. “But I’ve just had a record couple of months in terms of revenue.”
Still, many analysts warn that if the standoff in the Middle East continues and energy prices stay elevated, the pressure on the broader economy could intensify. Bank of America researchers noted that the jump in energy costs has already blunted some of the expected boost from the White House’s tax stimulus measures.For now, the US economy has shown it can absorb the initial shock of the war. But with the conflict still unresolved and energy markets remaining volatile, the coming months will be critical in determining whether this resilience holds or begins to crack.
