Trump's Economy Faces the Midterm Test

The economy served up a modest gift to Donald Trump this week: 2% annualized growth in the first quarter of 2026, a respectable rebound from the sluggish end to 2025. The headline number gives the president ammunition for the midterms looming in November. Trouble is, most Americans don’t live in headlines.

The underlying story is messier. Trump’s military campaign against Iran, now three months in, triggered an energy shock that wouldn’t look out of place in the 1970s. Brent crude hit $126 a barrel by Thursday before settling back to $111, a far cry from the $73 it traded for before the February war kickoff. At the pump, this translated to Americans paying $4.30 a gallon by late April, up from under $3 in February. Grocery aisles tell a similar story.

Consumer spending did grow by 1.6% annualized in Q1, cushioning the blow more than economists feared. The real engine of growth, though, came from tech giants pouring capital into artificial intelligence rollouts. As James Knightley at ING noted, investment “has clearly become the main engine of growth in the US” as consumer spending cools. Translation: the economy is running on fumes and circuit boards.

Inflation spiked to 3.3% in March, the highest in nearly two years and a sharp jump from February’s 2.4%. That reading killed any hopes of Federal Reserve rate cuts. The central bank held its base rate at 3.5-3.75% on Wednesday, a far cry from the cuts economists predicted before the Iran strikes began. Thirty-year mortgage rates climbed from 5.98% to 6.3%, tightening the screws on homebuyers.

Stock markets painted a prettier picture. The S&P 500 gained 5%, the Nasdaq jumped 10%, and the Dow rose just over 1% since the conflict began. Investors and pension holders benefited. For working Americans calculating whether they can afford to fill their tanks and feed their families, these gains feel abstract.

With Republicans at risk of losing the House and Senate in November, the midterms will hinge on a single calculation: do growth figures and stock rallies outweigh empty wallets at the checkout line? History suggests they don’t.