We don't know yet how the Iran war and the resulting surge in energy prices will ripple through the U.S. economy. We do know that American consumers were in pretty solid shape before it all began.

The big picture: New retail sales and employment data out this morning point to an underlying strength in consumer demand, propped up by wages that have kept rising.

• The question for the months ahead is whether the underlying trends that have kept consumers afloat — including a buoyant stock market and a low-layoff job market — can power it through an era of war-induced shocks and weak hiring.

Driving the news: Retail sales rose 0.6% in February, the Census Bureau said, reversing a January slump. Core control sales, which feed into GDP data, were up a similarly robust 0.5%, or 0.2% adjusted for inflation.

• Sales at auto dealers, recreational and sporting goods, and apparel were all strong — discretionary spending categories.
• Separately, payroll processor ADP said that private employment rose by 62,000 in March, the second consecutive month it found solid job creation.
• Also this morning, the Institute for Supply Management said manufacturing activity expanded for the third straight month in March, with its index of activity ticking up to 52.7, from 52.4.

Of note: The standout indicator in the report, however, was pay growth, which continues to hold up despite relatively sluggish jobs growth.

• "Jobs may be a bit modest when we look out over the last couple of years, but pay is telling a different story — that there is still a little bit of tightness in this labor market," ADP chief economist Nela Richardson told reporters this morning.
• "Pay growth continues to be solid and that is good support for workers generally," she said.
• One caveat: Hiring has been concentrated in health care, particularly sub-sectors that tend to offer lower-paying jobs.

Reality check: Consumers faced new headwinds in March that make the outlook for personal consumption in the coming months cloudy.

• Gasoline prices rose steadily over the course of the month, from just under $3 to more than $4 a gallon.
• The stock market turned wobbly, with the S&P 500 down 5.1% for the month (and down more before a remarkable surge in yesterday's trading).
• Extra-large tax refunds due to last year's One Big, Beautiful Bill Act have been forecast to create a surge of demand in the first half of the year, but so far the average refund has been at the lower end of forecasts.

What they're saying: The February sales data "confirmed that U.S. consumers are still spending, with little evidence of retrenchment so far," EY-Parthenon senior economist Lydia Boussour wrote in a note.

• "But that strength masks a fragile and uneven underlying foundation ahead of escalating tensions in the Middle East."
• "Looking ahead, we expect households to become increasingly selective rather than pull back abruptly," Boussour wrote. "Higher fuel costs will act as a tax on consumption, crowding out discretionary spending and leading to demand destruction in price-sensitive categories."

St. Louis Fed president Alberto Musalem this morning threw some cold water on the prospect that an AI-fueled surge in productivity might be reason enough to cut interest rates.

• It is a sign that Kevin Warsh, President Trump's nominee for Fed chair, will face internal resistance to his argument that the AI revolution justifies lower rates.

What they're saying: "I am hopeful — even optimistic — that higher productivity and potential growth lie ahead," Musalem said at the American Enterprise Institute.

• "But I believe it would be risky to ease monetary policy solely on the prospect of a future increase in productivity growth, especially with demand pressures at play and inflation running persistently above target today," he said.

Of note: Musalem also noted ways that the AI buildout might be contributing to price pressures now, fueling inflation rather than disinflation.

• "AI has mostly been a force driving demand higher today on the prospect of gains in productivity and aggregate supply in the future," he said.
• "The data center construction buildout and rising equity prices, with consumer spending driven by wealth effects, are two ways the AI boom is boosting demand today."
• Higher electricity prices, he said, are particularly visible effects.

Between the lines: Warsh, nominated to succeed chair Jerome Powell in mid-May (pending Senate confirmation, the timeline of which is murky), has argued that AI will enable rapid growth and lower interest rates to coincide — creating a rationale for rate cuts even amid solid growth.

• He looks to have an uphill battle ahead in persuading other Federal Open Market Committee members of the wisdom of this approach.