The U.S. economy entered 2026 on uncertain footing, and the first quarter did little to change the tone. The fourth quarter GDP was revised down to a 0.7% annual growth rate by the Bureau of Economic Analysis. What was initially a weaker reading from the prolonged government shutdown was subsequently lowered due to slower-than-expected consumer spending and business investment.
The new year then kicked off with a quarter that brought more question marks than it resolved. The Supreme Court ruled against the initial Liberation Day tariffs, and the administration was quick to replace them with new tariffs based on another trade law.
We also saw global uncertainty expand from trade policy to military conflict. The U.S. engagement in the Middle East has introduced a meaningful and unpredictable dimension to the economic outlook. The downstream effects, some of which are already visible in data, could impact everything from the consumer to Federal Reserve policy.
While the labor market remains under pressure, March’s data offered cautious confidence as we head into the remainder of the year. The Bureau of Labor Statistics reported the U.S. added 178,000 jobs in the month. This was welcome news following the February’s 133,000 job decline, which brought year-over-year employment growth to a mere 0.1% increase.
The unemployment rate also ticked down to 4.3%, although it was largely attributed to a 400,000 decrease among those looking for jobs. The participation rate, meaning the percent of Americans working or looking for a job, came down to 61.9% – the lowest level since 2021. Recent Census Bureau data suggested the working-age population (i.e., age 18 to 64) is shrinking by approximately 20,000 people per month, largely driven by a slowdown in immigration.
Elsewhere in the labor market, positive news came out of wage growth and productivity. Wages ticked up more than expected in February, climbing 0.4% for the month and 3.8% year-over-year. Additionally, a productivity report pointed to a 2.2% increase in output per hour for non-farm business sectors in 2025. While some of the increased efficiencies may be tied to AI-related initiatives, it’s important to note that the report marks the third consecutive year of solid productivity increases.
The consumer picture continues to show a mixed bag of tailwinds and headwinds. On the positive side, the Commerce Department reported that personal spending increased 0.4% at the turn of the year. This figure came in both higher than expected and ahead of schedule. 2025 tax refunds are projected to provide a boost to household spending for the coming months. An additional tailwind is the possibility of tariff refunds, the benefit of which could come through to consumers in the form of more competitive pricing and sales.
On the other hand, the headwinds are becoming more apparent. After dealing with inflation, tariff uncertainty, and a softer labor market, consumers are now looking at gasoline prices that have increased 33% since February. While the long-term effects remain to be seen, higher prices at the gas pump caused consumer sentiment to slip in March, as tracked by the University of Michigan. Quite notably, the decrease in sentiment also applied to higher-income households who had been a reliable engine of spending growth.
Setting aside the humanitarian element, the ongoing war in the Middle East is having a significant impact on energy markets and costs. Iran controls the Strait of Hormuz, a narrow passageway through which approximately 20% of the world’s oil supply flows. Disruptions in the corridor can send meaningful and immediate ripples through the energy market and broader economy. Even if the conflict is resolved quickly, gas prices have historically risen 30 cents on average between January and June due to seasonal demand, suggesting elevated prices at the pump may be here for a while. These higher costs tend to quickly work their way through to consumers and corporations. The Producer Price Index, a key indicator of inflationary trends, rose 0.7% in February – more than double the expected gain. The Bureau of Labor Statistics noted nearly 30% of the increased cost of processed goods can be directly traced to the higher prices in diesel fuel. The speed and severity of the conflict will play a meaningful role in the trajectory of inflation, consumer spending, and Federal Reserve policy.
