This month saw several notable developments that could impact the risk trajectory going forward.
First, the U.S. and Israel commenced air attacks on Iran. Previous incidents largely focused on Iran’s nuclear facilities, missile sites, or proxy assets. By contrast, the current conflict has been far broader, with the U.S. and Israel directly targeting Iranian state and regime leadership, including government buildings.
Early in the conflict, Iranian Supreme Leader Ayatollah Ali Khamenei was killed, along with the head of the Islamic Revolutionary Guard Corps (IRGC), Iran’s defense minister, and several other senior figures. And, unlike earlier episodes, such as January 2020, when the U.S. killed Qasem Soleimani, head of the IRGC Qods Force, Iran’s retaliation has been far more geographically expansive and indiscriminate, targeting nations in the region not directly involved in the conflict.
Rather than pursuing calibrated escalation, Iran appears intent on inflicting maximum damage on Gulf nations. In parallel with direct Iranian actions, Iran backed proxies have begun to mobilize, with Hezbollah initiating attacks on Israel and drawing Israel into renewed fighting in Lebanon. Other proxy groups have not yet engaged, though the Houthis in Yemen could be activated if the conflict persists, giving Iran additional avenues for counterstrikes.
With the Supreme Leader gone, an interim three-person council is temporarily governing Iran. The 88 member Assembly of Experts is responsible for selecting the next Supreme Leader; however, the timing remains unclear, as any successor would likely become an immediate military target. As a result, coordinated management of the country, and its armed forces, is limited, raising the possibility that elements of the military may operate more independently and with fewer restraints.
From an economic perspective, the conflict has put upward pressure on oil prices and restricted vessel traffic through the Strait of Hormuz. If oil prices remain elevated for a month or longer, this could have downstream implications for energy markets and overall inflation. That said, supply chain disruptions to the U.S. are less likely, as most goods and energy transiting the Strait of Hormuz are not U.S. bound but are instead destined for Europe. As a result, Europe is more likely to experience inflationary and supply chain pressures first.
Second, the U.S. Supreme Court struck down the administration’s country level tariffs. By way of background, the U.S. government had implemented a series of product specific tariffs, affecting items such as steel and autos, primarily under Section 232 of the Trade Expansion Act.
Beginning last April and thereafter, the government also imposed country level tariffs that applied to all goods imported from certain countries, using the International Emergency Economic Powers Act (IEEPA). One exception was some of the tariffs on China, which were implemented under Section 301. Both Sections 232 and 301 require studies conducted by the U.S. Trade Representative (USTR) and therefore take time to implement.
The distinction between product specific and country level tariffs is important, particularly with respect to how they are implemented, how they function, and how they affect the economy.
The Supreme Court’s decision invalidates the country level tariffs imposed under IEEPA. In response, the administration announced it will reinstate a flat 10% tariff on all nations under Section 122, which allows tariffs of up to 15% for a period of 150 days. At the same time, the administration will initiate investigations under Sections 232 and 301. This approach appears designed to allow tariffs to remain in place once the 150 day window under Section 122 expires. As a result, tariffs are likely to remain a feature of the policy environment for some time.
Third, in the fourth quarter, the U.S. economy expanded at a 1.4% annualized pace, a clear slowdown from trend and well below growth in the prior two quarters. A major drag came from the federal government shutdown, which furloughed thousands of workers and temporarily reduced government spending. Construction activity also declined, weighing on growth. These headwinds were partially offset by continued strength in the AI related economy and outsized contributions from healthcare, now the largest industry in the U.S. economy. For 2025 as a whole, economic growth totaled 2.2%, a solid figure, but slower than in recent years and broadly in line with our early 2025 outlook.
Beyond these three major developments, consumer inflation eased in January, with the Consumer Price Index (CPI) rising 2.4% year over year, down from 2.7% in December. Inflation slowed across all major categories, including food, energy, goods, and services.
In January, the U.S. economy added 130,000 jobs. On a standalone basis, this is a strong number. However, several nuances warrant attention. Of the 130,000 jobs added, 123,500 were in healthcare, 33,000 were in construction, and the federal government lost 33,000 jobs. As a result, nearly all net job gains were driven by healthcare, consistent with our view and our expectations for 2026 that healthcare demand and spending will remain a central pillar of the economy.
Additionally, the Bureau of Labor Statistics (BLS) revised its job estimates for 2024 and 2025 lower as part of its annual benchmarking process, which incorporates tax filing data to refine survey based estimates. Following these revisions, average monthly job gains in 2024 were revised down to 122,000 from 166,000, while average monthly gains in 2025 were revised to just 15,000 from 49,000. Against this backdrop, the 130,000 jobs added in January stand out. Still, month to month data can be volatile, and viewed more broadly, these revisions suggest labor market softness began emerging last year.
Housing activity remained weak at the end of 2025 amid affordability constraints and elevated unsold inventory. Housing starts fell sharply in December and declined modestly for the year as a whole, with single family construction particularly soft despite continued strength in multifamily activity.
Manufacturing output accelerated in January, posting its fastest year over year growth since 2022 and extending a prolonged but narrow recovery. Gains were concentrated in technology related manufacturing, particularly semiconductors, as well as defense and aerospace, reflecting geopolitical and national security priorities.
Finally, the U.S. and India announced their long pending trade deal. The agreement came just a week after the EU–India Free Trade Agreement (FTA) and may have been accelerated by that development. The U.S.–India deal should be viewed as a partial reset in bilateral relations, which deteriorated last summer after the U.S. imposed severe tariffs on India over India’s purchases of Russian oil, purchases that the U.S. had previously tacitly supported to help stabilize global energy prices. And after the U.S. claimed credit for ending the May India-Pakistan conflict (which India denied the U.S. was involved in). Both events caught India by surprise and strained relations. The new trade deal is expected to help revitalize ties between the two countries.
Best,
Shailesh Kumar, Head of Global Insights Center
To contact our team, visit TheHartford.com/gic
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