Cracks emerged in a resilient US economy before war in Iran sent oil prices rocketing

WASHINGTON (AP) — The highly resilient U.S. economy was already showing signs of strain even before the launch of the Iran war, data released Friday showed, underscoring the risks that rising gasoline and energy prices may pose.

The economy barely grew in the final three months of last year, the Commerce Department said, as it cut its estimate of fourth-quarter growth in half. Consumer spending, after adjusting for inflation, was anemic in January, as inflation remained sticky-high. Hiring has also ground largely to a standstill. And Americans' outlook for the economy tumbled after the U.S. and Israel attacked Iran, according to a survey of consumer sentiment also released Friday.

Gasoline prices have raced closer to $4 per gallon during the war, squeezing many household budgets that are already under pressure. Many Americans will receive larger-than-usual tax refunds in March and April because of the passage of President Donald Trump's tax cut law last year, but higher gas costs, if they persist, could soak up much or even all of those gains.

What's more, the Dow Jones has now fallen for three weeks straight, possibly impacting the wealthier U.S. households that have helped prop up overall consumer spending as lower-income families pull back.

“Underlying inflation pressures were already rising ahead of the war in the Middle East and are set to intensify,” Diane Swonk, chief economist at KPMG, said. Some Federal Reserve officials could even push for a hike in interest rates at its meeting next week, she added, though the central bank will probably stand pat.

Mortgage rates have been rising since the conflict began, likely because investors expect inflation will remain high. That could further weigh on the U.S. housing market, which has been in a slump dating back to 2022, when mortgage rates began to climb from pandemic-era lows.

Last fall’s 43-day government shutdown also hobbled growth at the end of last year. The economy advanced at an unexpectedly sluggish 0.7% annual rate from October through December, the Commerce Department reported Friday in a big downgrade from its initial estimate of 1.4%.

Growth in gross domestic product — the nation’s output of goods and services — was down sharply from 4.4% in last year’s third quarter and 3.8% in the second.

Federal government spending and investment, clobbered by the shutdown, plunged at a 16.7% rate, hacking 1.16 percentage points off fourth-quarter growth.

“Following two consecutive strong readings for the second and third quarters, the economy was expected to soften heading into year-end. It’s now increasingly clear that the economy not only slowed but stumbled into the finish line,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, said in a commentary. “The government shutdown was certainly a major factor in the loss of momentum, but a sharp decline in consumption growth also played a role.″

Separately, consumer spending grew modestly in January, rising 0.4%, but just 0.1% after adjusting for inflation. Incomes, after adjusting for taxes and transfers, jumped 0.9% as tax withholding fell because of 2025 tax changes. Yet wage growth has been cooling compared with a year ago.

New data shows that Americans have saved less in the past few months and lower-income families in particular have run up more debts. Weak hiring — the economy barely added jobs last year — has also weighed on consumer confidence.

Overall sentiment only declined slightly in March, according to the University of Michigan's consumer sentiment, but the survey was only half completed when the attack was launched on Iran. Those responding after Feb. 28, the start of the war, were much gloomier.

“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,” Joanne Hsu, director of the sentiment survey, said.

Separately, a measure of inflation closely watched by the Federal Reserve rose 2.8% in January from a year earlier. Yet that figure could top 3.5% in the coming months, economists have said, as gas prices have jumped to $3.63 a gallon on average nationwide, up from $2.94 a month ago, according to AAA.

For all of last year, the economy grew 2.1%, solid but down from 2.8% in 2024 and 2.9% in the year before that.

In the fourth quarter, consumer spending grew at a 2% clip, down from 3.5% in the third quarter and the 2.4% the government had initially estimated. Business investment, excluding housing, increased at a solid 2.2% pace, likely reflecting money being poured into artificial intelligence, but the increase was down from 3.2% in the third quarter.

A category within the GDP data that measures the economy’s underlying strength came in weaker than previously reported, growing at a 1.9% clip, down from 2.9% in the third quarter. This category includes consumer spending and private investment, but excludes volatile items like exports, inventories and government spending.

Meanwhile, the American job market is in a slump. Last month, companies, nonprofits and government agencies cut 92,000 jobs. In 2025, they added fewer than 10,000 jobs a month, the weakest hiring outside recession years since 2002.

A report Friday showed that companies posted nearly 7 million open jobs in January, a welcome increase from 6.6 million in December. Yet overall hiring was essentially unchanged, suggesting companies are reluctant to fill open positions, perhaps because of uncertainty around the impact of artificial intelligence.

Such reluctance may intensify if the war drags on and weighs on consumer confidence and spending.

Friday’s GDP was the second of the three estimates of fourth-quarter growth. The final report is due April 9.

FILE - A shopper pays with cash for a container of candy at a store, Thursday, Dec. 11, 2025, in Salem, N.H. (AP Photo/Charles Krupa, File)

FILE - A shopper considers large-screen televisions on display in a Costco warehouse Oct. 3, 2024, in Timnath, Colo. (AP Photo/David Zalubowski, File)

FILE - A person fuels up a vehicle at a gas station, Tuesday, March 10, 2026, in New York. (AP Photo/Yuki Iwamura, File)

CAIRO (AP) — Iranians began to regain internet access on Wednesday after authorities ended a monthslong shutdown. But users said service was slow and spotty in some areas, with apps like YouTube and Instagram heavily restricted, as they were before the cutoff began during nationwide protests in January.

Authorities justified the outage as a military imperative after the United States and Israel attacked Iran on Feb. 28. Their decision to lift some restrictions this week came as negotiators appeared to be closing in on a more permanent truce. But many Iranians feared access could be cut off again at a moment's notice.

Internet tracking company Netblocks said Iran’s connectivity, which measures the ability of devices to connect to the internet, is at around 86% of capacity from before the cutoff. Internet analysis firm Kentik said internet traffic, which measures the amount of data transferred and is a good illustration of usage, was at around 40%.

Amir Rashidi, an Iranian cybersecurity analyst, said there were still widespread disruptions. “It's too early to say the shutdown is over,” he wrote on X.

Iran’s roughly 90 million people have been cut off from the internet for most of 2026, one of the world’s longest and strictest national shutdowns. Young people with online careers saw their incomes evaporate. Job losses and the closure of online businesses added to the war's steep economic costs.

The cutoff made it difficult for Iranian families to communicate through months of unrest and war. At some points, phone lines were also cut off, though they were later restored.

A woman living in Tehran said that for months she was barely able to speak to her sons living abroad. She couldn't believe authorities had restored access, saying she had assumed they would find some justification to prolong the outage.

A taxi driver said service was restored but weak. He expressed hope it would improve so he could use messaging apps with family and friends. Both spoke on condition of anonymity for security reasons.

Prices spiked during the shutdown, with residents in Tehran at times paying around $7.50 per gigabyte. Prices are back down to around $2.25 for 30 gigabytes, roughly where they were before the protests.

Even then, Iran tightly controlled access to popular social media sites, leading many to rely on virtual private networks, or VPNs. The cost of those workarounds soared during the shutdown, making them unaffordable for many as the economy was battered.

Businesses have started reappearing online, announcing their return with posts on sites like Instagram and Telegram.

A gamer and tech influencer in the central city of Isfahan said the shutdown had caused him to lose a lot of his audience on YouTube and Instagram, where he had spent years building up a large following.

“All my views and interactions are way down. I’ve been erased from the algorithm,” he said in a voice note sent by WhatsApp, adding that his internet connection was still slower than before the shutdown.

“The situation is such that many content producers have had their income reduced to zero, have moved on to other jobs, or have been forced to sell their equipment to survive,” he said. He spoke on condition of anonymity for fear of reprisal.

Iranian authorities first shut down the internet in January during mass anti-government protests that were eventually stamped out in a violent crackdown. Thousands of people were killed and tens of thousands detained.

That cutoff was just starting to ease when the government imposed a complete internet blackout after the start of the war, when U.S. and Israeli strikes killed Iran's supreme leader and other top officials.

The government faced criticism for the prolonged shutdown, which caused even more harm to an economy devastated by inflation, strikes on key industries and a U.S. blockade on Iranian ports.

The internet cutoff cost an estimated $30-40 million daily, with indirect losses likely twice that much, a member of Iran’s Chamber of Commerce, Afshin Kolahi, told a local newspaper last month. About 10 million people have jobs that depend on internet connectivity, according to Communications Minister Sattar Hashemi.

Iranians still had access to a national net, but that has a far narrower reach, and users complained of poor service and heavy censorship. Senior government officials are given SIM cards granting them access to the global internet. Under pressure, the government expanded access to the SIM cards to some professions during the shutdown.

A woman checks her smartphone while sitting on a bench along a sidewalk in northern Tehran, Iran, Tuesday, May 26, 2026. (AP Photo/Vahid Salemi)