As the United States approaches the midterm elections, the economic landscape presents a paradox for voters. While recent growth figures indicate a resilient economy, the impact of escalating costs due to the US-Israeli conflict in Iran looms large. This backdrop is crucial as President Trump seeks to leverage economic performance to sway public opinion.
The Current State of Economic Growth
Recent data reveals that the US economy expanded at an annualised rate of 2% during the first quarter of 2026, a notable rebound following a period of stagnation at the tail end of 2025. This growth comes amidst the backdrop of rising tensions and sanctions arising from the conflict in Iran, which have contributed to increased costs for consumers. Despite the adverse conditions, economists suggest that consumer spending remained relatively robust, with a 1.6% increase in consumption year-on-year.
James Knightley, chief international economist at ING, emphasises that the surge in investment, particularly from technology firms involved in artificial intelligence, is driving this economic momentum. As consumer expenditures show signs of cooling, the focus appears to be shifting towards tech-related investments as the primary catalyst for growth in the current climate.
The Cost of Living Crisis
While the headline GDP figures may appear optimistic, the reality for many Americans is quite different. The conflict in Iran has exacerbated an already challenging cost of living situation. Oil prices have surged dramatically, with Brent crude reaching a four-year peak of $126 per barrel before settling at approximately $111. For American consumers, this translates to a staggering increase in fuel prices, which soared to $4.30 (£3.17) per gallon by late April, up from under $3 in February.
This spike in energy costs has contributed to a sharp rise in inflation, with annual price increases hitting 3.3% in March, the highest rate in nearly two years. Such economic pressures could be pivotal for voters, who are likely to prioritise their immediate financial concerns over broader economic indicators as they head to the polls in November.
Interest Rates and Housing Market Dynamics
The ramifications of rising oil prices and inflation have significantly affected monetary policy considerations. The Federal Reserve, in response to the latest inflation figures, has opted to maintain its base interest rate in the range of 3.5% to 3.75%. This decision dashed earlier expectations of potential rate cuts, as the ongoing conflict continues to influence economic predictions.
The housing market has not remained insulated from these developments; the average interest rate for a 30-year mortgage has increased from 5.98% to 6.3%. Samuel Tombs, chief US economist at Pantheon Macroeconomics, suggests that sustained high oil prices and continued geopolitical uncertainty may postpone any rate cuts until 2027, further complicating affordability for potential homebuyers.
Stock Market Resilience Amidst Turmoil
Despite the economic challenges stemming from the conflict, the performance of US stock markets has been surprisingly resilient. The major indices, including the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, have rebounded from initial losses incurred during the onset of hostilities. The Nasdaq has surged by approximately 10% since the conflict began, while the S&P 500 and Dow have also shown positive trends, albeit to a lesser extent.
This performance is encouraging for investors and those with pension funds tied to the stock market, providing some financial reassurance in an otherwise turbulent environment. However, as Republican strategists assess the political landscape, the potential loss of control in Congress adds pressure to the administration’s economic narrative.
Why it Matters
The juxtaposition of economic growth against the backdrop of rising living costs and geopolitical instability presents a complex scenario for voters as they prepare for the midterm elections. While Trump may attempt to champion economic indicators as a sign of success, the immediate concerns over inflation and energy prices will likely dominate voter sentiment. As the conflict in Iran continues to unfold, its implications for both the economy and political fortunes will be pivotal in shaping the future of American leadership.