By Gary C. Sanger, Ph.D., CFA
The lead story here is the US-Israeli attack on Iran. The conflict began February 28, and it continues to date. The Trump administration’s stated goal is to end the war within weeks. So far, despite oil prices rising above $100 per barrel, the global economic effects have been quite limited. If the conflict has not ended by the time I write the June Market Perspective, I will discuss longer term expectations. According to the Bureau of Economic Analysis, US real annualized GDP expanded by only 0.7% in Q4 2025 after a 4.4% rise in Q3. The drop was due to much lower Government spending due to the shutdown and lower exports. Projections for 2026 GDP growth range from 2.2% to 2.6%. The Conference Board’s Leading Economic Index fell slightly by 0.1% in January to 97.5 following a decrease of 0.2% in December. The Index has fallen 1.3% over the past six months. Declines in the LEI signal slower GDP growth, but not necessarily recession. Details in key areas follow below.
Consumers – Conditions in the consumer sector have been stable in the first quarter. The Bureau of Labor Statistics reported that the unemployment rate dropped to 4.3% in March, down from a four-year high of 4.6% in November. New job creation has been uneven with 178,000 new jobs created in March following a loss of 133,000 jobs in February. The economy has created an average of 15,000 jobs each month over the past half year. Also, initial jobless claims remain low at 202,000 for the week of March 28. Due to lower immigration and an increase in retirements, we are able to maintain low unemployment at a relatively low rate of new job creation. The Bureau of Economic Analysis reported that personal spending and personal income each increased by 0.4% in January. Surprisingly, the Conference Board’s Consumer Confidence index increased to 91.8 in March, up from 91.0 in February. US hourly wages for March are up 3.5% year-over-year.
Businesses – Conditions in the business sector have improved in Q1, and services remain stronger than manufacturing. The Bureau of Labor Statistics reported that Q4 2025 labor productivity increased by 1.8%, and it is up 2.5% year-over-year. The Federal Reserve reported that industrial production increased by 0.2% in February, and it is 1.4% above its year-earlier level. The US Institute for Supply Management manufacturing index decreased to 52.4% in February from 52.6% in January, but these two months of expansion stand out after a lengthy period of contraction. The ISM services index increased to 56.1% in February, up from 53.8% the previous month. The neutral number between expansion and contraction for both ISM indices is 50%.
Government – On the fiscal side the Trump administration’s tax cuts are impacting taxpayers positively, but they also contribute to the fiscal deficit. The IRS reported that early tax returns show refunds averaging 10.6% higher than at the same point last year. On the monetary side it is likely that the Federal Reserve will leave rates unchanged until the uncertainty resulting from the Iran war is resolved. PCE inflation for January was 2.8% year over year, modestly above the Fed’s target of 2.0%. At its March meeting the Federal Open Market Committee (FOMC) stated that it is considering one more quarter-point rate cut in 2026 and possibly one in 2027.
International – The March OECD Economic Outlook states “The conflict in the Middle East is testing the resilience of the global economy.” The war has introduced greater uncertainty into forecasts. The current projection for global real economic growth is 2.9% for 2026 and 3.0% for 2027. Inflation is projected to be down to target levels by 2027 in most major economies. The effect of tariffs has been less extreme than initially assumed.
Markets – The US equity market was down modestly in Q1 due largely to the war in Iran. The broad market, measured by the S&P 1500, was down 3.81%. Large-cap stocks (S&P 500) were down 4.33%, mid-cap stocks (S&P 400) were up 2.50%, and small-cap stocks (S&P 600) were up 3.51%. The broad market index is dominated by large-cap stocks. Global equity markets were also negative, with the S&P World Index down 3.63%. For fixed income, the S&P US Aggregate Bond Index was flat at 0.04%. All numbers are total returns including reinvested dividends or interest.
Closing – All forecasts in this letter must be conditioned on the uncertainty created by the Iran war. The optimistic outcome would be a quick end to hostilities with minimal disruption to global supply chains and low inflation. However, the pessimistic outcome of a longer conflict would lead to material supply chain disruptions, lower output, and higher inflation. I am hopeful that we will have a positive outcome and more clarity by the time I write the June Market Perspective.