The Iran conflict continues alternating between escalations and negotiations as the Mideast searches for a path to peace. The conflict has already done substantial damage to the global economy, and its shadow hangs over the domestic economic picture. For now, the U.S. is holding up, albeit with inflation well above ideal levels and labor markets pressured.
From a price and global supply perspective, the damage has been done to the global economy by the conflict. Between the 800 million barrels of crude oil that should have passed through the Strait of Hormuz since the Iran War started, the time needed to restart wells, and the damage to pipelines, refineries, and oil fields across the Persian Gulf, the impact on the global energy supply will linger for the remainder of this year and likely into next. Since 90% of the U.S. energy supply is sourced within North America, it’s the secondary impact through global supply chains and the global economy that will be more dramatic and lasting.
The conflict’s immediate effect has been on inflation, reversing the progress made by food prices and waning tariff impacts. The Consumer Price Index (CPI) in March jumped 0.9%. That’s the largest monthly increase since the Russia-Ukraine invasion in 2022 and represents a rise of 3.3% from a year ago. Energy jumped 11.3% year over year, while transportation services rose 4.1% as airfares soared 14.9%. Core CPI, which excludes food & energy, rose 0.2% in March and increased 2.6% on a year-over-year basis. Evidence of tariffs has crept into import-dominated categories like furniture, motor vehicle parts, footwear, and tires.
U.S. payrolls added 178,000 in March, nearly three times larger than the consensus expectation for 65,000. However, the February tally was revised sharply lower (to -133,000 from -92,000). Still, the six-month average rose to 14,833 from -1,000. The details remain mixed—wage growth cooled, hours worked slipped, but the unemployment rate improved. In short, the choppy back-and-forth gain-loss trend extended to 10 months.
Consumer spending, up 1.9% during the quarter and now 69% of total gross domestic product, continues as a key prop for the economy. Of concern is consumer sentiment, with the University of Michigan Monthly Consumer Sentiment Index plunging to 47.6 in March, the lowest on record dating back to 1978. Survey respondents blamed the Iran conflict for unfavorable changes in the economy and for their increased level of concern about inflation.
The mixed economic picture with an underwhelming but stable job market and inflationary flareups from the Iran conflict will likely keep the Federal Reserve (Fed) sidelined in the near term. Despite evidence of a sour vibe, it’s resilient consumers who will likely help the U.S. economy power through its challenges
Bottom line
Global energy damage is already done. Restarting the disrupted global oil flow—from transport, production, and damaged infrastructure—will take months. As a result, the U.S. will be buffered but still exposed to global economic spillovers. This will keep the U.S. economy feeling like it has one foot on the gas—driven by fiscal stimulus—and one foot on the brake, reflecting trade and tariff uncertainty, underwhelming job growth, and now the Iran situation.
