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Economic resilience amid prolonged conflict
America's economy expanded at an annualized rate of 2% in the first quarter of 2026, defying expectations of a slowdown triggered by the US-Israeli war in Iran, now in its third month. The conflict has sent global energy markets into turmoil, mirroring the oil crises of the 1970s and pushing up costs for fuel and everyday goods.
Growth drivers and consumer strain
The latest GDP figures, released this week, revealed a rebound from the sluggish end to 2025. Economists attributed the uptick to massive investments by tech giants in artificial intelligence, which offset weaker consumer spending. Household consumption grew by 1.6% annually, less than anticipated given the dual pressures of US tariffs and soaring energy prices.
"As consumer spending cools, investment linked to tech and AI has clearly become the main engine of growth in the US," said James Knightley, chief international economist at ING.
Energy shock and inflation surge
The closure of the Strait of Hormuz following US strikes on Iran sent Brent crude prices to a four-year high of $126 per barrel this week, before settling at $111. Before the war began in late February, prices hovered around $73. The surge has driven US gasoline prices to $4.30 per gallon, up from under $3 in February, according to the American Automobile Association.
Inflation followed suit, with March's annual price increases hitting 3.3%-a near two-year high and a sharp rise from February's 2.4%. The Federal Reserve held interest rates steady at 3.5% to 3.75% this week, dashing hopes for imminent cuts. Mortgage rates have climbed to 6.3%, up from 5.98% before the conflict.
"Higher oil prices and the US blockade of Iranian ports could delay rate cuts until 2027," warned Samuel Tombs, chief US economist at Pantheon Macroeconomics.
Stock markets rally despite turmoil
Investors have largely shrugged off the war's economic fallout. Major US indices-the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite-have recovered early losses and extended pre-war gains. The Nasdaq is up 10% since the conflict began, while the S&P 500 and Dow have risen by 5% and just over 1%, respectively. The rally has benefited pension funds and retirement accounts tied to stocks.
Midterms hinge on cost of living
With November's elections approaching, President Trump is framing the GDP growth as validation of his economic policies. However, analysts note that voters are far more likely to focus on rising living costs than headline growth figures. Republicans, facing potential losses in the House and Senate, are banking on economic messaging to sway undecided voters.
The trajectory of the Iran war-particularly whether the Strait of Hormuz reopens-will shape Trump's remaining time in office. A resolution could ease fuel and grocery prices, offering relief to American households before Election Day.
