US Q4 GDP second estimate and January durable goods data land amid Iran war volatility

Friday's economic data dump arrived at an awkward moment. The Bureau of Economic Analysis released its second preliminary estimate for Q4 2025 GDP alongside January durable goods orders and personal consumption expenditure figures, all while oil held above $90 per barrel and markets were still absorbing the implications of a closed Strait of Hormuz. The backward-looking GDP number tells you where the economy was. The forward-looking Atlanta Fed GDPNow model tells you where it may be heading, and that number has already moved sharply in the wrong direction.

The BEA's second estimate for Q4 2025 GDP came in at 2.3 percent annualized growth, unchanged from the advance estimate released in late January. That stability is somewhat reassuring, as second estimates sometimes revise the headline number by half a percentage point or more when new data on trade, inventories, and services consumption comes in. The unchanged reading indicates that the Q4 picture is settled, and it was a decent quarter, driven primarily by consumer spending and nonresidential fixed investment.

What the durable goods orders show

January durable goods orders rose 3.1 percent from December, beating the consensus estimate of 2.0 percent. The headline number was boosted significantly by a spike in aircraft orders, which are volatile month to month and can distort the top-line figure in either direction. Stripping out transportation equipment, durable goods orders rose 0.7 percent, which is the more informative reading for assessing underlying business investment trends.

The sub-category that economists watch most closely is nondefense capital goods orders excluding aircraft, commonly called core capital goods orders. This series is a proxy for business capital expenditure plans and feeds directly into GDP investment calculations. Core capital goods orders rose 0.8 percent in January, the third consecutive monthly increase. That suggests businesses were still committing to equipment and machinery purchases in January, before the Iran conflict began in late February and before energy prices spiked.

Personal consumption and the PCE inflation reading

January personal consumption expenditures fell 0.2 percent in nominal terms, the first monthly decline since March 2024. The drop was larger than the 0.1 percent decrease economists had forecast. Real personal spending, adjusted for inflation, fell 0.5 percent, as a modest rise in the PCE price index offset some of the nominal decline. The BEA reported the January PCE price index rose 0.3 percent month over month, putting the year-over-year reading at 2.5 percent, up slightly from December's 2.4 percent.

The Federal Reserve's preferred inflation measure is the core PCE price index, which excludes food and energy. Core PCE rose 0.3 percent in January and 2.6 percent year over year, unchanged from December. The Fed's target is 2 percent. A core PCE reading of 2.6 percent, combined with energy prices that have risen sharply since the Iran campaign began, gives the Federal Open Market Committee essentially no room to cut rates at its April 29 and 30 meeting. Fed funds futures markets on Thursday were pricing just an 8 percent probability of a rate cut at that meeting, down from 34 percent at the start of March.

The Atlanta Fed GDPNow revision and what it implies

The Atlanta Fed's GDPNow model, which provides a real-time estimate of current-quarter GDP growth based on available data, revised its Q1 2026 projection down to 2.1 percent from 3.0 percent following the first two weeks of the Iran conflict. The model incorporates incoming data automatically as it is released, which means Friday's personal consumption miss will feed into the next GDPNow update, likely pushing the estimate lower still.

A 0.9 percentage point downward revision to the GDPNow estimate in roughly three weeks is a fast move. For context, the model's Q4 2025 estimate was stable within a 0.4 percentage point range for the entire month of November before the final reading. The Q1 revision reflects specific factors that the model is capturing: lower personal consumption, higher energy import costs that widen the trade deficit, and reduced consumer and business sentiment that typically leads to lower spending and investment. None of those inputs are likely to improve quickly if the Strait of Hormuz remains effectively closed.

How the data interacts with the Fed's current position

The combination of slower growth and sticky inflation is the scenario the Federal Reserve least wants to manage. When growth is weak and inflation is falling, the Fed can cut rates. When growth is strong and inflation is rising, the Fed can raise rates. When both are moving in the wrong direction simultaneously, the Fed has no clean option. It cannot cut rates without risking further inflation acceleration, and it cannot raise rates without compressing an already slowing economy.

Fed Chair Jerome Powell addressed this tension obliquely in prepared remarks at the Chicago Council on Global Affairs on March 7, saying the Fed would 'proceed carefully' and avoid overreacting to supply-side inflation shocks that it cannot control with monetary policy. That phrasing signaled the Fed is likely to hold rates at 4.25 to 4.50 percent through at least the June 2026 meeting, barring a significant change in either direction on inflation or employment. The next jobs report covering February employment data is due on April 4, and it will be the first major labor market reading since the Iran campaign began.

Business investment data and the war's timing problem

The January durable goods and PCE data covers economic activity before the Iran war started. That is the fundamental limitation of Friday's releases for assessing current conditions. January's core capital goods orders showed businesses were investing. January's consumer spending showed households pulling back slightly. Neither number tells you what is happening in March, when gas prices are 68 cents per gallon higher than they were in February, fertilizer costs are up 30 percent, and consumer sentiment has fallen to its lowest level in over two years.

The first economic data that will reflect war conditions directly is the March University of Michigan Consumer Sentiment final reading, due March 28, and the March ISM Manufacturing Index, due April 1. The ISM survey asks purchasing managers about current business conditions, new orders, and input prices in real time, making it one of the fastest-updating indicators of how manufacturing-sector businesses are responding to the energy price and supply chain disruptions that began in late February. The February ISM Manufacturing Index, released March 3 before hostilities began, came in at 50.3, barely in expansion territory.