The Iran war is starting to show up in ways both obvious and not so much, with soaring energy costs leading the impact and potential hits on broader growth simmering beneath the surface.
- Oil prices will be key. Joseph Brusuelas, chief economist at RSM, drew a line at $125 a barrel for West Texas intermediate crude as the point where “it becomes more of an economic problem.”
- Inflation data is where the war’s impact shows up most directly
The war has intensified the pressure, resulting in a host of questions: whether the inflation surge during the war is temporary, how much conditions will affect the consumers who drive most U.S. economic growth, and the extent to which less energy-independent nations are hurt by the war fallout.
Underlining all of it is how the Federal Reserve and other central banks will respond.
"Iran’s important. The price of crude oil is important. Other things matter more. Incomes and other things are continuing to hang in there,” Mike Skordeles, head of U.S. economics at Truist Advisory Service said. “The other piece of that uncertainty is by the Fed that’s delaying — and I think it’s delaying, not canceling — any sort of additional cuts, pushing them into the back half or even later in the year. That means you’re elevating borrowing costs for consumers.”
High rates come at a bad time with prices at the pump — most recently at national average $4.10 a gallon, according to AAA — already hitting consumers. A spike in mortgage rates also helped drive existing home sales in March to their lowest in nine months.
Debit and credit card spending surged 4.3% in March, the most in more than three years, according to Bank of America. That was powered by a 16.5% jump in spending at gas stations.
Bigger tax refunds following changes made in last year’s One Big Beautiful Bill Act aren't helping much. Higher refunds, though, don’t square with consumer sentiment surveys.
In fact, the widely followed University of Michigan survey showed sentiment at a record low in numbers going all the way back to the 1950s — through multiple wars, 1970s stagflation, the Sept. 11, 2001, terror attacks, the global financial crisis and the Covid pandemic.
Goldman Sachs a few days ago cut its GDP forecast this year to 2%, measured from fourth quarter to fourth quarter, a reduction of half a percentage point from its prior outlook. The Atlanta Fed projects that first-quarter growth will total just 1.3%.
The Wall Street investment bank also noted that “weaker activity growth is likely to translate to weaker hiring and a higher unemployment rate,” which it now sees at 4.6% by year’s end.
