The fragile Middle East cease-fire is largely holding, with U.S. crude oil prices slipping below $100 per barrel. Yet, the stable-to-improved economic data that has emerged since the onset of the Iran War illustrates that the United States is powering through the uncertainty and damage to the global economy caused by the conflict.
Economic growth, as measured by gross domestic product (GDP), has stayed strong. Business investment was the biggest contributor, surging to a 6.2% annualized growth rate in the first quarter. AI and technology investment remain key drivers, while improving corporate earnings reinforce the positive outlook. Consumer spending has stayed resilient thanks to stable employment trends, tax refunds up 17.8% from a year ago, and contained tariff pressures.
It appears that the jobs growth trend has improved, including the first back-to-back monthly gains in a year in March and April, along with the upshifts in the six-month averages for overall job growth and private payrolls. Additionally, hours worked rose, while the unemployment rate was unchanged at 4.3%, and wages for all workers grew 3.5% from a year ago, above the pre-pandemic average of 3.0%. Still, the economy is overly reliant on the health care industry, which accounted for practically all the job growth in the past year.
Productivity slowed again in 1Q26, but so did labor costs. U.S. productivity—a measure of output per hour worked—rose 0.8% at an annualized rate during the first quarter, slowing from 1.6% in the previous quarter. Much of the decline was related to hours worked, which climbed 0.7% in the quarter. That helped keep unit labor costs—the cost of labor required to produce one unit of output—in check, up 2.3%.
Consumer confidence dropped again, although inflation worries ebbed. The University of Michigan Monthly Consumer Sentiment Survey preliminary reading for May fell to 48.2, the lowest on record dating back to 1978. The spike in crude oil has quickly flowed through to gasoline and diesel prices and is likely going to add to the sour consumer vibe. It remains to be seen whether it causes consumers to step back in terms of actual spending. The good news on the consumer front is that one-year inflation expectations dipped slightly to 4.5%, while longer-term inflation expectations slipped to 3.4%.
This muddled backdrop will likely keep the Federal Reserve (Fed) sidelined in the near term, particularly amid the uncertainties of the Iran situation. Prior to the Middle East conflict, the direction of inflation had shifted and was clearly no longer grinding lower. The labor market remains soft enough to keep rate increases in check despite recent strengthening. Until there’s clearer direction on the impact of the conflict on inflation, we expect the Fed to stay on hold. That potentially delays the next Fed rate cut to the fall.
Bottom line
The U.S. economy continues to power through the uncertainty caused by the Iran War and the subsequent spike in gasoline prices. Important drivers—such as AI-led tech investment—have taken the lead as a key growth engine, while improving corporate earnings and rising guidance suggest that oil risks aren’t the dominant force shaping the U.S. economy.
With inflation no longer decelerating before the conflict and higher oil prices now pushing gasoline and diesel sharply higher, consumer spending risks are rising despite the offset from larger tax refunds. Against this muddled backdrop, we expect the Fed to stay on hold perhaps until late summer or fall.
