The U.S. economy has so far absorbed the shock of the Iran conflict with limited disruption to aggregate activity, but Barclays warns the durability of that resilience is uncertain.
Barclays' tracking estimate places first-quarter GDP growth at 2.3% quarter-on-quarter on a seasonally adjusted annualized basis, roughly one percentage point higher than the GDPNow figure. The bank attributes most of the gap to the normalization of federal government spending following last year’s shutdown rather than an across-the-board pickup in private-sector demand.
Maintaining its medium-term outlook, Barclays keeps a baseline forecast of 2.4% GDP growth on a fourth-quarter-over-fourth-quarter basis for 2026 and 1.5% for 2027.
On the production side, a 0.5% month-on-month decline in industrial production in March came in softer than forecast. Barclays, however, judges that the fall largely reflects the normalization of volatile components - specifically utilities, motor vehicle assemblies and mining - rather than a broad-based weakening of demand. The bank highlights particularly strong demand for AI-related capital goods so far this year, calling that segment "riding especially high."
Consumer-side indicators are less sanguine. Through February, consumer spending is tracking at a modest 0.8% quarter-on-quarter annualized pace. Barclays projects March retail sales will rise 1.3% month-on-month, with the control group - a closer proxy for underlying consumption - up 0.3%.
On fiscal balances, Barclays has raised its budget-deficit projections to $2.0 trillion in both fiscal 2026 and fiscal 2027. The upward revision reflects likely shortfalls in tariff revenue alongside additional defense spending. The bank notes that larger deficits should provide a cushion for demand in the face of geopolitical headwinds.
Turning to monetary policy, Barclays expects the Federal Reserve to leave policy rates unchanged at its April meeting. The bank currently has two 25 basis-point rate cuts penciled in - one in September 2026 and another in March 2027 - but it also flags that risks are skewed toward a more prolonged period without easing.
Implications for markets and industry
- Manufacturing and capital-goods sectors are seeing mixed signals: headline industrial production fell, but AI-related equipment demand remains strong.
- Retail and consumer-facing industries are softer, consistent with tepid consumer spending growth through February.
- Fiscal loosening tied to higher deficits may help support aggregate demand, with potential relevance for defense-related procurement.