In an aerial view, Marathon Petroleum Corp’s Los Angeles refinery is seen April 2, 2026 in Carson, California.
Justin Sullivan | Getty Images
The war in Iran is beginning to manifest itself in the U.S. economy in both obvious and discreet ways, with soaring energy costs having an impact and potential blow to broader growth simmering beneath the surface.
However recession fears have increased Since fighting began more than six weeks ago, most economists believe the war will have only modest effects on gross domestic product – perhaps reducing a few tenths of a percentage point overall.
But there is an important caveat, mainly regarding duration: the current ceasefire If the situation continues, the inflationary effects will attenuate. However, if fighting resumes, the future will become much bleaker, threatening the economy’s fragile growth over the past two quarters.
“It’s going to wipe out some of the growth, but we’ll get there,” said Mike Skordeles, head of the U.S. economy at Truist Advisory Services. “The biggest problem is uncertainty.”
Indeed, uncertainty has hovered over the U.S. economy for most of the past year, since President Donald Trump revealed his “liberation day” rates beginning of April 2025 and will continue through what has become an increasingly muscular and aggressive foreign policy.
The war intensified the pressure, which gave rise to many questions: inflation surge the war is temporary, to what extent the conditions will affect consumers who are the engine of American economic growth and to what extent less energy independent nations will be affected by the fallout from the war.
Underlining all this is how the Federal Reserve and other central banks will react.
“Iran is important. The price of crude oil is important. Other things matter more. Revenues and other things continue to hold up there,” Skordeles said. “The other piece of this uncertainty is the Fed delaying – and I think delaying, not canceling – any sort of additional cuts, pushing them into the second half of the year or even later in the year. That means you’re increasing borrowing costs for consumers.”
Suffering at the pumpThe high rates come at a bad time with prices at the pump – most recently at national average $4.10 per gallon, according to AAA – which is already hitting consumers. A rise in mortgage rates also helped push existing home sales in March to their lowest level in nine months.
Still, debit and credit card spending jumped 4.3% in March, the biggest increase in more than three years, according to Bank of America.
This is explained by a 16.5% increase in spending at gas stations. But there was also “healthy growth” of 3.6% excluding gas, the bank said, indicating that portfolios were still resilient enough to cope with the rise.
One factor that should help support consumers is the increase in rebate checks following changes to last year’s One Big Beautiful Bill Act. THE average reimbursement this year was $3,521, an 11.1% increase over the same period in 2025, according to IRS data.
However, higher spending does not correspond to consumer confidence surveys.
In fact, the widely followed University of Michigan survey showed feeling at an all-time high in numbers dating back to the 1950s – through multiple wars, the stagflation of the 1970s, the terrorist attacks of September 11, 2001, the global financial crisis and the Covid pandemic.
But the link between weak confidence and economic activity can be tenuous. Consumers can often say one thing and do another.
“A decline in consumer confidence has never been a reliable indicator of real consumer behavior and we expect real consumer spending to continue to grow, albeit slowly, increasing 0.8% over the course of this year and 1.7% over the course of 2027,” David Kelly, chief global strategist at JPMorgan Asset Management, said in his weekly market note.
Oil prices will be decisive.
Joseph Brusuelas, chief economist at RSM, set a limit of $125 a barrel for West Texas Intermediate crude, the U.S. benchmark, as the point where “this becomes more of an economic issue.” Oil was trading near $91 Wednesday morning, below the peak of $115 it briefly surpassed earlier in April.
“This is where demand destruction starts to accelerate and expand. So we’re still a long way off,” Brusuelas said. “I’m not ready to say that we’ve suffered structural scars. We’re not there yet, because I don’t know the extent of the damage to physical production and refining capacity,” in the Middle East.
Reduce expectationsEconomists expect the net impact of the war to result in a slowdown in growth, but not a major collapse.
Goldman Sachs a few days ago lowered its GDP forecast for this year to 2%, measured from one fourth quarter to the next, a reduction of half a percentage point from its previous forecast. The Atlanta Fed projects first-quarter growth of just 1.3%, better than the fourth quarter’s meager 0.5% growth rate, but lower than previous estimates of 3.2%.
The Wall Street investment bank also noted that “weaker growth in activity would likely translate into lower hiring and a higher unemployment rate,” which it now estimates at 4.6% by the end of the year, a gain of just 0.3 percentage points from March’s level.
Overall, Goldman expects the impact to push the Fed to make multiple interest rate cuts later this year.
“Soaring oil prices, increased uncertainty about the outlook and strong [March] The jobs reports have kept the Fed firmly in wait-and-see mode for now,” Goldman economists Jessica Rindels and David Mericle said in a note. “We expect that a combination of rising unemployment and limited progress on inflation — where the effects of tariff removal are expected to outweigh the pass-through of incoming energy — will make the case for two cuts in September and December.”
This is a more aggressive forecast than current market prices, which do not indicate any reduction until at least mid-2027. In March, Fed officials drew a single line.
The most obvious obstacle standing in the Fed’s way is inflation.
Before 2026, the central bank was expected to continue lowering rates to support the slowing labor market. Job growth has changed little over the past year and is negative when health care-related positions are subtracted.
But persistent inflation would derail the Fed and could set off a chain of negative events throughout the year.
Global consequencesInflation data is where the impact of the war appears most directly, and the news so far has been mixed.
As expected, headline inflation surged. THE consumer price index all products increased by 0.9% in March, bringing the annual inflation rate to 3.3%. However, excluding food and energy, the monthly increase remained at just 0.2% and the annual base level at 2.6%, still above the Fed’s 2% spectrum, but moving in the right direction.
Likewise, the producer price indexwhich measures increases at the wholesale level, accelerated by 0.5% for overall volume but only 0.1% for the core sector.
Interestingly, the New York Fed’s monthly consumer survey, which is much less volatile than the University of Michigan version, indicated that year-over-year inflation expectations in March were 3.4%, up 0.3 percentage points per month, but well below the 4.8% predicted by the Michigan survey.
Fighting inflation is not just a problem in the United States. Indeed, the biggest impact, particularly on the oil side, could be felt more in Europe and especially in Asia, which relies heavily on Middle Eastern fuel sources to power its economies.
“We’re feeling a price shock from energy, but not really a supply shock,” said Skordeles, the Truist economist. “Asia is the one that is hit, because it is the largest user.”
The war has upended supply chains, an impact that is likely to be felt more keenly in the coming months as raw material flows tighten and begin to reflect the knock-on effects of rising energy prices.
The New York Fed’s Global Supply Chain Pressure Index reached its highest level since January 2023 in March.
It is not yet clear whether there will be any repercussions in the United States, although so far the feeling is that the impact will be limited.
“Energy costs, although they have increased in recent years, remain much cheaper than they were compared to previous decades,” Skordeles said. “We’re going to suffer from this. It will impact growth, but it’s not the end game.”