Inflation Up, Growth Down: US Economy Sending Distress Signals

Good evening! It's Friday the 13th, but we'd rather look ahead to tomorrow, 3/14 - otherwise known as Pi Day. Here's what we were monitoring today while deciding what kind of pie we want tomorrow.

US Economy Showed Signs of Strain Heading Into Iran War

The U.S economy was a bit shakier heading into the war with Iran than previously thought, according to new government data published Friday.

Economic growth was considerably slower at the end of 2025 than initial estimates indicated, the Commerce Department announced. The revised data show that the economy grew by just 0.7% in the fourth quarter, half the initial estimate of 1.4% and well below expectations of 1.5%.

The annual growth rate was revised lower, as well, with gross domestic product expanding by 2.1% in 2025, a tenth of a percentage point lower than previously reported. The economy grew at a 2.8% rate in 2024.

The downward revision was driven by the sharp downturn in government spending connected to the weeks-long shutdown that began in October. Consumer spending and investment were a bit weaker than first estimated, and exports fell by a greater degree.

Prices still rising: In addition to slower growth at the end of last year, inflation appears to have heated up at the start of this year.

According to a separate Commerce report, the core Personal Consumption Expenditures price index - a measure of inflation that strips out volatile food and fuel prices - ticked higher to 3.1% on an annual basis in January, a tenth of a point higher than in December and well above the Federal Reserve's 2% target. The full PCE index moved a tenth of a point lower to 2.8%, but the core rate is seen by many analysts, including those at the Fed, as the most accurate indicator of the underlying inflation trend.

What analysts are saying: Both reports released Friday cover data that was collected before the U.S. and Israel launched a new war with Iran, raising concerns that the economy could be in for a rough patch once higher energy prices begin to affect consumers and businesses. The average price of a gallon of gasoline rose to $3.63 nationally Friday, according to AAA, up from $2.94 a month ago. If the trends of higher costs and severely anemic growth persist, a period of stagflation - in which unemployment and prices rise at the same time - becomes a real threat.

Omair Sharif of the research firm Inflation Insights said that the latest data is not encouraging. "All the key measures are moving in the wrong direction," Sharif told The New York Times.

The January inflation numbers represent "the calm before the storm," said Joseph Brusuelas, chief economist at RSM. In a research note, he wrote that he expects the topline inflation rate to rise to 3.5% or higher, driven by a combination of persistent pricing pressure in the service sector and rising energy costs.

Diane Swonk, chief economist at KPMG, also warned of higher inflation. "Underlying inflation pressures were already rising ahead of the war in the Middle East and are set to intensify," she said, per the Associated Press.

The rising risk of inflation, and with it stagflation, suggests that the Fed will be extremely cautious when it reviews interest rate policy at its meeting next week. "The Fed is now looking at an environment where inflation remains sticky and will soon get an energy-fueled boost, while GDP growth and the labor market continue to lose momentum," said Bret Kenwell, an analyst at eToro, per Fox Business. "That is not an easy setup for aggressive rate cuts unless the economy shows clearer signs of meaningful deterioration."

Quote of the Day

"There is abundant evidence that the subpoenas' dominant (if not sole) purpose is to harass and pressure Powell either to yield to the President or to resign and make way for a Fed Chair who will. On the other side of the scale, the Government has offered no evidence whatsoever that Powell committed any crime other than displeasing the President. The Court must thus conclude that the asserted justifications for these subpoenas are mere pretexts. It will therefore grant the Board's Motion to Quash."

• U.S. District Judge James E. Boasberg, assessing the Trump administration's effort to investigate Federal Reserve Chair Jerome Powell. In a 27-page ruling dated March 11 and unsealed today, Boasberg blocked the Justice Department's attempt to subpoena Federal Reserve records.

U.S. Attorney Jeanine Pirro, the former Fox News host appointed as the top federal prosecutor in D.C. by President Trump, launched an investigation into Powell last year relating to testimony he gave to Congress about a multi-billion-dollar renovation of Federal Reserve headquarters. Trump has criticized the project's cost overruns and Powell's management of the construction while continuing to attack the Fed chair over interest rates that the president says should be much lower.

In an extraordinary video statement released in January, Powell called the investigation a political attack on the central bank's independence. "The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President," he said.

Pirro slammed the ruling and called Boasberg an "activist judge' at a fiery news conference Friday and said she would appeal it. "This is wrong and it is without legal authority," she said.

Republican Sen. Thom Tillis has said he will block the confirmation of any Fed nominees, including Kevin Warsh, Trump's pick to replace Powell, until the Justice Department's investigation is closed.

"We all know how this is going to end and the D.C. U.S. Attorney's Office should save itself further embarrassment and move on," Tillis said Friday. "Appealing the ruling will only delay the confirmation of Kevin Warsh as the next Fed Chair."

DHS Shutdown Hits One-Month Mark With Little Sign of Progress

The partial shutdown of the Department of Homeland Security will reach the one-month mark tomorrow. Transportation Security Administration agents are now missing their first full paychecks of this shutdown, and the agency said this week that more than 300 of its agents have quit over the past month, but the White House and congressional Democrats are nowhere near a deal to end the funding lapse.

Over the past four weeks, the Senate has repeatedly failed to advance funding for all or parts of DHS, as Democrats and Republicans continued to block proposals from the other party.

Democrats continue to demand reforms to Immigration and Customs Enforcement and Customs and Border Patrol but have offered to fund other agencies within DHS. They say Republicans have blocked those measures, which could ease the pain of the shutdown, because they don't want to reform ICE.

"Right now, we could be paying TSA agents, funding FEMA before the next disaster hits, protecting our cyber defenses, and making sure the Coast Guard gets paid. But Republicans said no," Senate Democratic Leader Chuck Schumer said Thursday. "Democrats have tried-six separate times-to pass simple bills to keep these critical parts of DHS running while negotiations continue. Six times Republicans came to the floor and blocked them. TSA officers shouldn't miss paychecks, disaster relief shouldn't be left hanging, and Americans' safety shouldn't be collateral damage in a political standoff Republicans created."

Republicans say Democrats are playing politics and withholding funds for some vital national security functions at a time when the country faces a heightened threat environment as well as increased TSA staffing shortages that are causing airport delays.

"Democrats just tried to, once again, defund law enforcement," Republican Sen. Katie Britt of Alabama said this week after blocking a Democratic plan to fund agencies within DHS except for Immigration and Customs Enforcement, Customs and Border Protection and the office of the secretary. "We're not going back to Biden's failed border policies and the era of 'Defund the Police.'"

What's next: The shutdown will drag on. The Senate will have some other items on its agenda for next week, including a confirmation hearing for Sen. Markwayne Mullin as Homeland Security Secretary and an attempt by Republicans to bring up the "Save America Act," which would require proof of citizenship to register to vote and photo IDs at polling locations. President Trump also wants the bill to include other controversial provisions, including tight restrictions that would largely eliminate mail-in voting and prohibitions against transgender women playing in women's sports and some transgender procedures for minors.

The bottom line: Each side is betting it has some leverage. Democrats feel the American public is on their side regarding the Trump administration's immigration enforcement tactics. The White House reportedly expects that Democrats will face more pressure to end the shutdown as airport problems mount and we get further away from the January shooting deaths of Renee Good and Alex Pretti in Minneapolis. TSA agents are caught in the middle.

Fiscal News Roundup

• US Orders 2,500 Marines and an Amphibious Assault Ship to Mideast After Almost 2 Weeks of War – Associated Press
• US Intensifies Iran War Rhetoric as Oil Rises – Bloomberg
• Trump: Iran War Will End When I 'Feel It in My Bones' – Politico
• Republican Lawmakers Shrug at More Funding for Iran War – Politico
• Court Blocks Justice Department Subpoenas of Federal Reserve – Washington Post
• One Month Later, White House and Democrats No Closer to Ending the DHS Shutdown – Politico
• The Oil Tankers Trump Seized Are Costing the U.S. Millions of Dollars – New York Times
• Trump Administration Set to Receive $10 Billion Fee for Brokering TikTok Deal – Wall Street Journal
• Trump Signs Executive Orders Aimed at Addressing Home Affordability Concerns Ahead of Midterms – Associated Press
• Economy Was Shakier Than It Appeared Heading Into Iran Conflict – Washington Post
• Trump Administration Readies Plans to Dismantle Renowned Science Lab – New York Times
• Tax Season Off to Slow Start Again, Despite Lure of Bigger Refunds – Politico
• Mullin Departure Creates 'House Whisperer' Vacancy for Senate GOP – The Hill
• 1 in 3 Say They Cut Back Elsewhere to Pay for Health Care: Survey – The Hill

Views and Analysis

• The Latest Economic Numbers Are Brutal for Trump – Timothy Noah, New Republic
• Elizabeth Warren's Amazingly Progressive Housing Bill – Robert Kuttner, American Prospect
• A Senate Road to Less Housing – Wall Street Journal Editorial Board
• The GOP Is Having an Epiphany: This Is a Bad Look – Kathleen Parker, Washington Post
• Three Cheers for Scuttling the Jones Act – Anastasia Boden, Washington Post
• The Republican Party Continues Eating Its Own – Elaine Godfrey and Russell Berman, The Atlantic
• We're All Trapped in Trump's 1980s Worldview – Marc Champion, Bloomberg