Iran war fallout raises odds of a U.S. recession, economists say

The ongoing Iran war has sparked concerns among economists and Wall Street analysts about the potential for the U.S. to fall into a recession in the next 12 months. According to Goldman Sachs analysts, the conflict could lead to a 0.2 percentage point increase in U.S. inflation, reaching 3.1% by the end of the year. This rise in inflation is expected to weigh on consumer spending and economic growth, with the investment bank raising the probability of a recession to 30%.

Economists at consulting firm EY-Parthenon also see a heightened risk of a severe downturn, estimating a 40% chance of recession within the next year. The disruption of global oil supply caused by the war, particularly in the Strait of Hormuz through which 20% of crude and natural gas normally flows, is expected to contribute to persistent inflation and economic challenges.

The increase in gasoline prices, with the national average reaching $3.98 a gallon and diesel prices at $5.37 a gallon, is already impacting households and industries like farming, trucking, and construction. The rise in fuel costs is expected to lead to higher food prices as well, as disruptions in fertilizer supplies are likely to drive up input costs for farmers.

Furthermore, the transportation industry is feeling the effects of the war, with airlines implementing surcharges and raising ticket prices to account for higher jet fuel costs. The U.S. Postal Service has also announced an 8% postage surcharge to offset growing transportation expenses. These price hikes are expected to constrain economic activity and potentially push the economy into a recession.

While oil prices have increased significantly since the outbreak of hostilities, experts believe that the U.S. is relatively well-positioned to withstand the impact of the conflict. Factors such as the country’s status as the world’s largest oil producer and consumers spending a smaller share of their incomes on energy goods and services contribute to this resilience.

Despite the potential challenges posed by the Iran war, some economists remain optimistic about the U.S. economy’s ability to avoid a recession. Factors such as fuel-efficient vehicles, tax refunds, and strong economic fundamentals before the conflict provide a buffer against the negative effects of rising energy prices. While uncertainties remain, the probability of a recession in the U.S. is estimated to be around 10% by some experts.