Here are all the ways the Iran war has affected the U.S. economy so far

The Iran war has begun to make its mark on the U.S. economy, with the impact being felt in various ways. The primary effect has been the surge in energy costs, which is causing ripple effects throughout different sectors. While economists predict only a modest impact on overall gross domestic product (GDP), the duration of the conflict remains a crucial factor in determining the extent of the economic fallout.

Mike Skordeles, head of U.S. economics at Truist Advisory Services, emphasized the importance of uncertainty in the current economic climate. The war has raised significant questions about the sustainability of the current inflation surge, the resilience of consumer spending, and the vulnerability of less energy-independent nations to the war’s aftermath. Additionally, the response of central banks, particularly the Federal Reserve, will play a crucial role in shaping economic outcomes.

One of the most immediate impacts of the conflict is the spike in energy prices, leading to higher costs at the pump. With the national average gas price reaching $4.10 per gallon, consumers are already feeling the strain. The rise in mortgage rates has also contributed to a slowdown in the housing market, with existing home sales hitting a nine-month low in March.

Despite these challenges, consumer spending has shown resilience, with debit and credit card spending experiencing a significant increase in March. Notably, spending at gas stations surged by 16.5%, indicating that consumers are still willing to spend despite rising costs. Moreover, tax refund checks have provided additional support to consumer wallets, with the average refund amount increasing by 11.1% compared to the previous year.

However, consumer sentiment remains low, with the University of Michigan survey reporting record-low numbers. While low sentiment can sometimes be disconnected from actual consumer behavior, economists like David Kelly from JPMorgan Asset Management expect real consumer spending to continue growing gradually over the coming years.

The trajectory of oil prices remains a key factor in determining the economic impact of the war. Joseph Brusuelas, chief economist at RSM, highlighted the $125 per barrel threshold for West Texas Intermediate crude as a critical point where economic challenges could escalate. As oil prices hover around $91 per barrel, the extent of damage to production and refining capacity in the Middle East will also influence economic outcomes.

Overall, economists anticipate slower growth but not a major breakdown as a result of the war. Goldman Sachs recently revised its GDP forecast for the year, projecting 2% growth from the fourth quarter of 2026 to the fourth quarter of 2027. The Federal Reserve is expected to respond with multiple interest rate cuts later in the year to address weakening economic activity and rising unemployment rates.

In conclusion, the Iran war is beginning to leave its mark on the U.S. economy, with rising energy costs and uncertainty weighing on growth prospects. The duration of the conflict and the response of central banks will be crucial in shaping the economic landscape in the months ahead. In March, Federal Reserve officials considered the possibility of reducing rates to support a slowing labor market. The expectation was that the central bank would continue to lower rates, but one reduction was penciled in for the near future. However, there are several obstacles standing in the Fed’s way, with the most prominent being inflation.

The current inflation data reveals a mixed impact of the ongoing war. Headline inflation has surged, with the consumer price index for all items rising by 0.9% in March, leading to an annual inflation rate of 3.3%. When excluding food and energy, the monthly increase was only 0.2%, with the annual core level at 2.6% – still above the Fed’s target of 2%.

Similarly, the producer price index showed an acceleration of 0.5% on headline inflation, but only 0.1% for core inflation. The New York Fed’s consumer survey reported one-year inflation expectations at 3.4% in March, which is up by 0.4 percentage points from the previous month.

The impact of inflation is not limited to the U.S. alone. The war has disrupted global supply chains, particularly affecting Europe and Asia, which heavily rely on Middle East fuel sources. The New York Fed’s Global Supply Chain Pressure Index reached its highest level since January 2023 in March, indicating potential challenges ahead.

Despite the uncertainties surrounding inflation and global supply chains, economists believe that the impact on the U.S. economy may be limited. Energy costs, while increasing, are still relatively cheaper compared to previous decades. The overall sentiment is that the economy will navigate through these challenges, albeit with some impact on growth.

As the Fed continues to monitor inflation and global developments, the path forward remains uncertain. The ongoing war and its repercussions on supply chains and energy prices could have far-reaching implications, but the resilience of the U.S. economy may help mitigate some of these risks. It is essential for policymakers to remain vigilant and prepared to take necessary actions to support economic stability in the face of these challenges.