The American economy is slowing: weaker growth, stubborn inflation, and consumer caution are increasing uncertainty

Cracks in American growth are becoming more visible

The American economy is still growing, but the latest stream of data shows that this growth is no longer as broad-based or as convincing as it was in the second half of 2025. The picture taking shape in mid-March 2026 is not one of a sudden collapse, but of an economy that is slowing down, while inflationary pressures have not completely disappeared, and households and businesses are becoming more sensitive to every new shock. That is precisely why developments in the United States are being watched not only by Wall Street, but also by European exporters, commodity producers, the technology sector, and central banks around the world. When the U.S. slows down, the consequences do not remain within American borders.

The second estimate of U.S. GDP for the fourth quarter of 2025 showed that real growth amounted to just 0.7 percent at an annual rate, after 4.4 percent in the third quarter. Such a drop in momentum is especially important because it happened before the latest geopolitical tensions further increased nervousness in the energy and commodity markets. In other words, part of the problem was visible even without an external shock: consumption was still keeping the economy afloat, but overall momentum had already weakened, while government spending and exports were pulling in the opposite direction. This is the first clear signal that the American cycle is in a more sensitive phase than it appeared just a few months ago.

Growth exists, but it has lost breadth

On paper, the American economy is still avoiding a recession scenario. Household incomes rose in January, and personal consumption continued to grow. According to data from the U.S. Bureau of Economic Analysis, personal income increased by 0.4 percent in January, while personal consumption expenditures rose by 0.4 percent. At the same time, the savings rate also rose to 4.5 percent, suggesting that some households are trying to rebuild their financial cushion after a period of high interest rates and more expensive borrowing. But that is exactly where the ambiguity of the current situation lies: income growth has not disappeared, but households are deciding more cautiously when and on what they will spend.

Retail confirms this. The estimate for January showed a decline in retail sales and food services of 0.2 percent compared with the previous month, although sales were still 3.2 percent higher year-on-year. Such a combination suggests that the American consumer has not yet given up, but is no longer spending with the same ease as during the period of stronger growth. For global markets, this is an important nuance. American consumption has for decades been one of the key pillars of global demand, so any gradual weakening of it immediately becomes relevant for exporters from Europe and Asia, but also for countries that depend on the consumption of energy, metals, and industrial components.

An additional problem is the fact that consumption no longer acts as an unconditional shock absorber for all other weaknesses. During previous years, the American economy repeatedly proved surprisingly resilient precisely because households continued to spend even when industry, the real estate sector, or exports were weakening. That resilience is still visible now, but it is less impressive. This does not mean that a sharp break is coming, but that the margin for error is becoming narrower. If energy prices or borrowing costs rise again, the consumer no longer has the same level of security as when growth was broader, the labor market firmer, and inflation falling faster.

Inflation is no longer explosive, but it is not completely defeated either

At first glance, the inflation picture looks encouraging. Consumer prices in February were 2.4 percent higher year-on-year than a year earlier, which is significantly lower than the peaks recorded earlier in the inflation cycle. Core inflation, which excludes food and energy, stood at 2.5 percent. However, that is not a level that allows the Federal Reserve to relax completely. A monthly increase in the consumer price index of 0.3 percent shows that pressures are still present, and housing and healthcare costs remain among the more important sources of stubborn inflation.

For monetary policy, this is an awkward combination. When inflation is high, the central bank knows it must maintain a restrictive tone. When growth is strong, the economy copes more easily with higher interest rates. But when growth is slowing and inflation still is not moving entirely smoothly toward the target, room for maneuver becomes noticeably smaller. That is exactly why the American public and financial markets are increasingly talking about a scenario in which the economy does not necessarily enter a recession, but remains trapped longer in a zone of weaker growth and still elevated prices.

Such a scenario is particularly unpleasant for middle-income households. Nominally, wages and incomes may rise, but the feeling of improvement is absent if housing, food, insurance, healthcare, and credit costs remain high. It is in that gap that consumer caution is usually born, and that is precisely what is becoming increasingly visible in sentiment surveys. In other words, the problem of the American economy is no longer just a matter of macroeconomic tables, but also a matter of confidence: do citizens believe that the coming months will be better for them, or only less bad.

Consumer sentiment warns of a deeper problem

Preliminary data from the University of Michigan for March show that the consumer sentiment index fell to 55.5 points, lower than in February and below the level from the same month last year. Even more important is that the expectations component weakened more markedly than the assessment of current conditions. This means that some households are not only dissatisfied with current living costs, but are also more cautious in assessing their personal finances in the months ahead. The same survey also recorded that one-year inflation expectations remained elevated at 3.4 percent, while long-term expectations stood at 3.2 percent.

Such data do not automatically mean that consumption will fall sharply, but they show how sensitive sentiment is to every new disruption. Research director Joanne Hsu warned that interviews conducted after the outbreak of the U.S.-Iran military conflict produced weaker responses and erased earlier gains in sentiment, with fuel prices among the first channels through which consumers feel geopolitical stress. This is an important detail because it shows that the slowdown did not appear only after the new external shock, but can be further deepened by that shock. In other words, the foundation had already cracked, and the new instability is now testing how resilient the structure is.

For markets, this is more important than it appears at first glance. Financial investors often track inflation and employment figures as the main signals, but consumer sentiment is often an early indicator of a broader change in behavior. When citizens become more cautious, this can, with a time lag, spill over into purchases of cars, homes, technological products, travel, and all those segments that generate a strong multiplier effect. In the global economy, where American consumption remains crucial for many supply chains, such a turn rarely remains a local story.

The labor market is no longer an equally strong pillar of support

The American labor market was for a long time the main argument of the optimists. Even when inflation was too high, and when industry was showing weaknesses, employment often remained solid enough to neutralize part of the fear. But cracks are appearing there as well. In February, the number of nonfarm employees decreased by 92 thousand, while the unemployment rate remained at 4.4 percent. This is not a dramatic jump in unemployment, but it is a sign that the labor market no longer appears as impenetrable as before.

It is important to look at the structure here. The decline in employment is partly linked to strikes in healthcare, but official data simultaneously show continued weakness in the information sector and in federal government services. When such signals appear together with slowing GDP and more cautious consumers, they cease to be isolated statistical details and become part of a broader story. For the Federal Reserve, this means that it can no longer observe inflation outside the context of employment, because any excessively prolonged maintenance of restrictive policy could further cool the labor market.

Exaggeration should nevertheless be avoided. An unemployment rate of 4.4 percent in itself is not a level that would point to a deep crisis. The problem lies elsewhere: in the direction of movement. The American economy showed considerably greater vitality in 2025, and now the key pillars are gradually softening one after another. In such an environment, investors no longer ask only whether the economy is growing, but also how resilient that growth is to a new jump in oil prices, geopolitical uncertainty, or a weaker investment cycle.

Industry and housing construction offer a mixed picture

Some sectors are still sending better news. Industrial production rose by 0.7 percent in January, and manufacturing output by 0.6 percent. This shows that the American production base is not in free fall and that part of industry is still benefiting from domestic demand, infrastructure investment, and technological investments. But at the same time, capacity utilization remained below the long-term average, at 76.2 percent, suggesting that the economy is not operating at full power. In other words, industry is holding up, but it is not pulling the overall cycle the way it would in a stronger phase of expansion.

The housing sector does not offer a clear-cut answer either. The start of construction of single-family homes in January was 2.8 percent lower than the month before, while housing completions increased. This may mean that projects started earlier are being brought to completion, but that investors and builders remain more cautious when it comes to new decisions. High interest rates are still affecting the availability of housing loans, and the real estate market is precisely one of the sectors that reacts fastest to changes in monetary policy. Therefore, weakness in housing construction is not just a sector story, but also an indicator of broader economic sentiment.

It is precisely from these mixed data that the most realistic description of the American economy at this moment emerges: it has not stopped yet, but it is no longer accelerating. Some segments remain functional and resilient, but the overall energy of the system is visibly weaker. Such a phase is often unpleasant because it does not provide simple answers. There is no spectacular break that would make the situation clear to everyone, but neither is there sufficiently strong growth that would remove doubts.

Foreign trade and global effects

One of the few fresh data points that appears encouraging is the foreign trade balance. The U.S. deficit in trade in goods and services narrowed in January from 72.9 to 54.5 billion dollars, with exports rising and imports falling. At first glance, this looks like a positive signal, but caution is needed here as well. A decline in imports is not always just good news; sometimes it is also a reflection of weaker domestic demand. If American consumers and businesses are ordering fewer imported goods, that improves the balance in the short term, but it can also mean that growth is cooling.

For the rest of the world, this is precisely the key point. When the U.S. slows imports, the consequences are felt by exporters ranging from the European automotive industry to Asian electronics manufacturers and Latin American raw material suppliers. The American economy matters not only because of its own size, but also because its domestic demand absorbs goods, services, and capital from many other economies. That is why every more visible crack in American growth quickly becomes a European, Asian, or global issue as well.

An additional layer of uncertainty comes from the geopolitical environment. If new conflicts raise energy and transport prices, American consumers could feel another wave of pressure on household budgets, while businesses would simultaneously face higher input costs. In that case, growth could weaken further precisely when inflation again threatens to remain above the zone of complete comfort for monetary authorities. This is a scenario that markets particularly dislike: not because it implies catastrophe, but because it prolongs uncertainty.

What the Federal Reserve is watching now

The American central bank is entering the spring of 2026 with an unenviable task. On the one hand, GDP growth slowed much more strongly than it appeared in the first estimate, and the labor market no longer looks as firm as before. On the other hand, inflation is lower, but it has not disappeared, and inflation expectations among consumers have worsened again. This means that in the coming weeks and months the Federal Reserve will have to weigh the risk of keeping high interest rates for too long against the risk of easing policy too early.

The GDPNow model of the Atlanta Fed branch currently estimates U.S. economic growth in the first quarter of 2026 at 2.7 percent, which shows that the short-term picture is not unequivocally negative. But such estimates should be read with caution: they are sensitive to new incoming data and can change quickly. More important than a single number itself is the fact that official data are already showing an economy that is moving more slowly, more unevenly, and with less certainty than before. Markets are therefore not looking only for an answer to the question of whether the Fed will cut interest rates, but also how long the American economy can withstand the current combination of slower growth, still relatively expensive money, and new geopolitical risk.

That is precisely the broader significance of the current American story. The cracks in growth have not yet turned into a break, but they have become too numerous to be dismissed as passing statistical noise. Slowing GDP, more cautious consumers, weaker sentiment, a less convincing labor market, and inflation that does not surrender without resistance together form the picture of an economy entering a more sensitive phase. For investors, this means more caution, for exporters more uncertainty, and for the rest of the world a reminder that the fate of American demand still largely determines the rhythm of the global economy.

Sources:

• - U.S. Bureau of Economic Analysis – second estimate of GDP for the fourth quarter of 2025 and the official summary of the slowdown in American growth (link)
• - U.S. Bureau of Economic Analysis – overview of the American economy with data on personal income and consumption for January 2026 and the foreign trade balance (link)
• - U.S. Bureau of Labor Statistics – February inflation data, including headline and core CPI and the composition of price growth (link)
• - U.S. Bureau of Labor Statistics – February report on employment and the unemployment rate in the U.S. (link)
• - U.S. Census Bureau – estimate of January retail sales and food services in the U.S. (link)
• - U.S. Census Bureau – data on new residential construction in January 2026 (link)
• - Federal Reserve Board – industrial production and capacity utilization in January 2026 (link)
• - University of Michigan, Surveys of Consumers – preliminary results for March 2026, including sentiment and consumer inflation expectations (link)
• - Federal Reserve Bank of Atlanta – GDPNow model for estimating growth in the first quarter of 2026 (link)