By Nicole Goodkind
Friday's economic data dump offered little comfort.
A downward revision to fourth-quarter gross domestic product, a firm inflation reading, and a jobs market losing steam have rekindled an uncomfortable question: Is the U.S. economy heading somewhere bad?
The short answer is no, or at least not yet. But the path forward has gotten considerably narrower for the Federal Reserve, for consumers, and even for the White House.
The economy grew far less than expected in the fourth quarter. GDP growth was revised down to 0.7% -- halved from the initial 1.4% estimate, which itself had already missed expectations of 2.8%. The drag came largely from slower personal consumption, which accounts for roughly two-thirds of the U.S. economy.
EY-Parthenon Chief Economist Gregory Daco described 2025's economic expansion as "largely jobless," with firms increasingly doing more with less in a high-cost, high-interest-rate environment. He now projects real GDP growth of just 2.0% for 2026, slowing further through year-end.
Inflation isn't cooperating either. The Fed's preferred gauge, the core personal consumption expenditures price index, rose by 3.1% annually in January, its highest level since early 2024. That marks the third consecutive month of acceleration, running well above the pace the Fed wants to see before it continues to cut interest rates.
Services inflation alone accelerated to 3.5%, according to new Bureau of Economic Analysis data on Friday morning.
Most alarmingly, none of this data yet reflect the energy price shock that the war in Iran has unleashed. Economists broadly expect March data to look significantly worse. EY-Parthenon's Daco and Joe Brusuelas of RSM both project annual headline PCE climbing toward the mid-3% range, or higher, by midyear as oil prices feed through to gas, utilities, and supply chains.
That leaves the Fed in an uncomfortable spot. With inflation reaccelerating and growth slowing, their traditional policy tool kit offers no clean answers. Lowering interest rates risks stoking inflation but holding them steady could tip a slowing economy over the edge.
Wall Street has scaled back its expectations for rate cuts this year: Traders now see a roughly one-in-three chance that rates don't move at all in 2026.
"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, investment analyst at eToro. "That is not an easy setup for aggressive rate cuts."
Consumers are already feeling the squeeze. January's 0.4% rise in Americans' spending was concentrated in healthcare and housing, which is largely necessity spending.
Spending in discretionary categories like clothing and motor vehicles actually declined. Real spending, adjusted for inflation, rose just 0.1%.
"The income foundation supporting that spending is fragile," wrote EY-Parthenon's Daco.
Still, the White House has kept its message steady through all of this: They want the Fed to lower rates. President Donald Trump posted on social media Thursday evening calling on Fed Chair Jerome Powell to cut "IMMEDIATELY."
Powell is unlikely to oblige. With inflation above target and energy prices climbing, the Fed will likely remain firmly on hold at their March policy meeting next week and into the second half of the year. The incoming chair, who will take the mantle when Powell's term expires in May, is set to inherit a monetary policy situation with no easy moves.
The word "stagflation" has started circulating again on Wall Street as well. Most economists are quick to push back. We're not there, and current fears appear premature, they say.
But the combination of solid inflation, slowing growth, and a labor market averaging just 13,000 monthly job gains over the past year means the margin for error is shrinking.
Write to Nicole Goodkind at nicole.goodkind@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 13, 2026 11:58 ET (15:58 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments