Three months into the Iran war, the U.S. economy looks troubled on the surface but has proven more durable than many feared. The conflict has pushed energy prices to four-year highs, reignited inflation, and driven consumer confidence to record lows. 

Yet the broadest economic indicators have held up better than those headline concerns might suggest.

The honest answer to how much damage has been done depends heavily on which measure you look at and which Americans you ask.

Economic Growth Is Still Positive but Backward-Looking

The most comprehensive measure of the economy, gross domestic product, is still growing solidly. However, the most recent GDP data covers only the first quarter of the year, which included just one full month of the war’s effects. The more meaningful test of the conflict’s economic impact will come when second-quarter data is available.

The Job Market Has Held Steady Against Expectations

Employment data has been one of the clearer sources of resilience during the conflict.

Jobs grew steadily in the first two months after the war began, and the unemployment rate remained low. March job growth was the highest in two years, defying economist expectations. 

More recent months have shown some slowing, though economists note that data from the prior two months was influenced by a bounceback from the government shutdown and temporary effects including major labor strikes.

As long as unemployment stays contained and employers keep hiring, consumer spending has a floor beneath it regardless of how dark the sentiment data becomes.

Retail Sales Are Holding Up, With a Catch

Consumer spending has continued to grow each month, even when stripping out the effect of higher gasoline prices.

Retail sales rose dramatically in March, partly inflated by surging fuel costs, and continued to grow in April. 

The control group measure, which removes volatile categories like gas, grew just under 0.5% in April, suggesting that Americans are still purchasing goods beyond necessities despite the financial pressure they are feeling at the pump.

That resilience is real, but analysts caution it may not last indefinitely if energy costs remain elevated through the second half of the year.

Inflation Is Where the Damage Is Most Visible

Consumer inflation rose to a three-year high in April, driven primarily by gasoline but increasingly spreading into other categories.

Food prices are up 3.2% over the past year. Airfares have surged 20.7%. Housing-related costs jumped sharply in April, partly due to a statistical catch-up from missing data during last year’s government shutdown. 

The breadth of the inflation increase is what concerns economists most, as it signals the energy shock is seeping into corners of the economy well beyond the gas station.

Inflation Has Wiped Out Wage Gains for Most Americans

For the first time since 2023, inflation rose faster in April than average American paychecks grew over the prior year.

That means lower and middle-income workers are having to dip into savings or take on debt to afford the same goods they were buying a year ago. The divide between income groups is stark. Higher-income households are seeing annual pay raises that cover their increased gas costs many times over. 

For lower-income workers, the raise barely covered the increase in fuel alone, according to Bank of America Institute data.

The K-shaped dynamic that has characterized the post-pandemic economy has widened significantly under the pressure of the energy shock.

Consumer Sentiment Reflects Exhaustion, Not Just Fear

Americans are already psychologically depleted from living through the worst inflation crisis in four decades. Even as inflation has eased from its 2022 peaks, the experience of persistently high prices has left a lasting imprint on how people feel about the economy.

Consumer sentiment has fallen to record lows, and the Iran war’s impact on gas prices and groceries has landed on top of a public that had not yet fully recovered its confidence. 

The experience of paying elevated prices every day at the grocery store and gas station shapes how people feel in ways that GDP growth rates simply do not capture.

Bond Markets Are Flashing the Clearest Warning

While stocks have climbed to record highs driven by AI-related earnings and ceasefire optimism, the bond market has told a different and more troubling story.

The benchmark 10-year Treasury yield has risen to its highest level in more than a year, reflecting investor concern that inflation will remain elevated for longer than policymakers anticipated. 

Higher yields are already pushing mortgage rates to their highest levels in nine months, further freezing a housing market that had only recently begun to show signs of life.

The divergence between buoyant equity markets and bond market pricing in persistent inflation is one of the clearest expressions of the unresolved tension at the heart of the current economic moment. 

Until the Strait of Hormuz reopens and energy prices begin to sustainably retreat, that tension is unlikely to resolve.