Key insights
- The Iran war is impacting the US economy, primarily through rising energy prices and inflation. March PCE rose to 3.5%, the highest since May 2023. Consumer spending slowed to 1.6%, and GDP growth was slightly below expectations at 2%. Higher energy prices may further dampen discretionary spending, potentially weakening economic growth and increasing pressure on the Federal Reserve to maintain higher interest rates.
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The effects of the conflict in the Middle East have spread beyond gas prices, according to economic data released Thursday, but there was no sign the strain was yet leading to layoffs.
A slew of data Thursday about consumer spending, prices, wages, economic growth, and jobless claims painted a mixed picture of the health of the economy, with the fingerprints of the Iran war all over it.
The most obvious impact of the fighting showed up in the cost of living as measured by the Personal Consumption Expenditures price index, which rose 3.5% over the year in March, up from a 2.8% annual increase in February, according to the Bureau of Economic Analysis. That was the highest since May 2023, and was largely because of the surge in gasoline prices due to the war's disruption of oil supplies from the Middle East. However, even setting aside gas, "core" PCE prices, which exclude the volatile prices for food and energy, rose 3.2% over the year, the most since January 2024.
The war may have influenced consumer spending decisions as well, according to spending and income data. The effects were large enough to be seen in the BEA's report on the Gross Domestic Product for the first quarter, which only included the first month of the conflict. Personal spending rose at an inflation-adjusted annual rate of 1.6% in the quarter, a slowdown from 1.9% in the fourth quarter of last year.
"Declining consumer sentiment and rising inflation expectations likely diminished consumer appetites," Kurt Rankin, senior economist at PNC Bank, wrote in a commentary. "As household budgets face the likelihood of higher energy prices through much of the year ahead, discretionary spending adjustments to the downside are likely to continue in the quarters ahead."
Thursday's data releases show the economy staying afloat but showing a few leaks from the early impact of the Iran war.
The overall GDP grew at an annualized rate of 2%, less than the 2.2% forecasters had expected but reflecting a bounce-back from the fourth quarter of last year, as businesses splurged on AI: equipment spending rose 17% and intellectual property investment rose 13% as companies poured money into data centers and software.
The war left its mark on spending statistics, according to the BEA's data for March. Spending on motor vehicles rose 2.4%, while household equipment jumped 1.5% over the month, possibly because people were trying to get ahead of war-related price increases.
"It appears consumers moved forward some planned purchases to get ahead of any further inflationary spike due to the war," Scott Anderson, chief U.S. economist at BMO Capital Markets wrote in a commentary.
Overall, consumer spending rose 0.9% in March, in line with forecaster expectations and reflecting increased spending on gasoline. The personal saving rate fell to 3.6%, its lowest since October 2022, as households sacrificed to pay for those pricier fill-ups.
The high gas prices are not weighing on the economy enough to force companies to lay off workers. In fact, only 189,000 people filed for unemployment last week, the fewest in any week since 1969, the Department of Labor said Thursday.
That doesn't mean the hit isn't coming.
"Past experience also shows it takes a few months for higher energy prices to squeeze employment," Oliver Allen, senior U.S. economist at Pantheon Macroeconomics wrote in a commentary. "Accordingly, we still think the unemployment rate will rise this summer."
The round of data showed the economy staying resilient but households starting to show the strain
"The stock market and economy are being held up mainly by the big surge in AI investment," Heather Long, chief economist at Navy Federal Credit Union, wrote in a commentary. "Meanwhile, on Main Street, people are hurting from the highest inflation in three years and gas prices back at $4.30. Households are paying about $70 more a month at the pump. Nearly half of the larger tax refunds have already gone to pay for higher gas prices for many families. The only encouraging news is layoffs remain low. But it’s a big warning sign that consumption has slowed to just 1.6% in the first quarter.”