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As the midterm elections approach, Americans are increasingly focused on the economy, with President Donald Trump’s economic policies under scrutiny. The ongoing conflict in Iran, which has now extended into its third month, is causing significant strain on the global economy, reminiscent of the oil crises of the 1970s. This situation has led to soaring prices for essential goods, including fuel and groceries. However, recent GDP figures indicate that the US economy has shown resilience, leaving many to wonder how this will influence voter sentiment as the elections draw near.
Economic Growth Amidst Challenges
Despite the turmoil stemming from the Iran conflict, the US economy displayed unexpected growth in the first quarter of 2026. Official statistics reveal an annualised growth rate of 2%, a notable recovery following a slowdown at the tail end of the previous year. This growth comes in the face of rising consumer prices due to US tariffs and the energy shock triggered by the war.
Economists are cautiously optimistic, noting that consumer spending, which increased by 1.6% on an annualised basis, has not suffered as severely as anticipated. The boost in growth is largely attributed to heavy investments by technology companies, particularly in the area of artificial intelligence. James Knightley, ING’s chief international economist, commented, “As consumer spending cools, investment linked to tech and AI has clearly become the main engine of growth in the US.”
Rising Costs and Inflation Pressures
While the headline growth figures are promising, the reality for many Americans is starkly different, especially regarding the cost of living. The conflict in Iran, coupled with Trump’s military actions, has led to a significant spike in oil prices. Brent crude, a key oil benchmark, surged to a four-year high of $126 per barrel before settling back to around $111. For consumers, this translates to an average fuel price of $4.30 (£3.17) per gallon by late April, a sharp increase from less than $3 in February.
This surge in fuel costs has had a ripple effect, pushing inflation rates to a near two-year high of 3.3% in March, compared to 2.4% in February. With the elections looming, voters are likely to assess candidates not just on economic growth but on their ability to manage the rising cost of living.
Interest Rates and Housing Market Implications
The economic turmoil has dashed hopes for immediate interest rate cuts by the Federal Reserve, which opted to maintain its base rate between 3.5% and 3.75%. Prior to the outbreak of conflict, many economists expected a series of cuts to encourage economic growth. However, with inflation on the rise, particularly in light of the energy crisis, these predictions have been reassessed.
The impact on the housing market has been notable, with the average interest rate for a 30-year mortgage climbing from 5.98% to 6.3% since the onset of military actions against Iran. Samuel Tombs, chief US economist at Pantheon Macroeconomics, has suggested that high oil prices and the expectation of sustained military action could delay any potential rate cuts until 2027.
Stock Market Resilience Amidst Uncertainty
In a notably contrasting development, the stock market has shown resilience during the ongoing conflict. Major US indices, including the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, have rebounded significantly, making up for losses incurred in the early phases of the conflict. Since the conflict began, the Nasdaq has surged by roughly 10%, while the S&P 500 is up about 5%, and the Dow has gained just over 1%.
This recovery in the stock market is positive news for investors and those with pension plans tied to equities, such as 401(k) accounts. However, with the Republican Party facing potential losses in the House and possibly the Senate, the state of the economy will play a crucial role in determining the outcome of the elections.
Why it Matters
As voters prepare to head to the polls, the economic landscape is pivotal in shaping their decisions. While positive GDP growth and a recovering stock market provide some reassurance, the pressing issue of rising living costs looms large. How effectively Trump can navigate these challenges in the coming months will not only influence his presidency but also determine his party’s standing in the crucial midterm elections. The intersection of economic performance and the ongoing conflict in Iran makes this a critical moment for both the administration and American voters alike.
