Even with the current ceasefire, does the US and Israel war against Iran portend recession?
Since US President Donald Trump and Israel’s Prime Minister Benjamin Netanyahu launched their war on 28 February, US stocks tumbled to a six-month low, interest rates rose and gasoline prices are up by $1.00 a gallon.
With only a trickle of oil and gas exiting the Persian Gulf, oil prices have spiked by over 50%. Shipments are severely disrupted and even if the war ends today it would take two to four months for the oil market to return to normal.
Are we veering towards recession or worse? The short answer is, yes, a recession is more likely now than at any time since the global financial crisis of 2007 to 2009.
Regrettably, most Americans under 40 have little memory of economic distress.
They’ve been living through good times with a steadily growing economy. Yes, there was a brief two-month-long Covid recession in 2020 but that was followed by a mighty V-shaped rebound. US stock prices doubled over the past five years with yearly gains averaging 14%. But these good times may be over.
President Trump and his acolytes emphasize that the US is energy self-sufficient and thus not much impacted by the supply disruption. But Asia is and the distress is worsening daily as supplies are depleted. South Korea is limiting driving and Indonesia is doing the same but also rationing fuel. Quite simply, you can’t take 20 to 30% of oil off the market without far-reaching negative effects.
Economic historian Niall Ferguson boldly declares “we’re facing the biggest energy shock of our lifetime”. Some readers will remember the oil shocks of the 1970s when an Arab oil embargo triggered a quadrupling of prices and a 16-month-long recession. From 1973 to 1975 Wall Street endured a 40% price decline.
Global financial crisis
The biggest bear market and recession, of course, came with the global financial crisis. Ten trillion dollars of wealth evaporated, US unemployment reached 10%, and gross domestic product fell by over 4%. The S&P 500 index declined 57% from 2007 to 2009.
But again, younger people are more likely to focus on the recovery instead of that horrific downturn. The bounce back was remarkable and historic. For 11 years from 2009 to 2020 Wall Street rode an unprecedented boom with equity prices rising 400%.
It’s not just falling equity prices that signal danger ahead. What about that sinister combination of economic stagnation and inflation, stagflation? In March, Federal Reserve chairman Jay Powell dismissed that risk, denying a comparison to the stagflation of the 1970s when unemployment approached 8% compared to today’s 4.4%.
Global growth was slowing even before the war began while inflation already exceeds the Fed’s 2% target. Asset manager Pimco argues that every sustained 20% increase in the oil price translates into a 1% rise in inflation. As of 2 April, Brent crude had risen 59%. Current projections say US inflation in 2026 will exceed 4%.
Powell, whose term as Fed chairman expires in May, has been relaxed about the economic effects of the war. Two-and-one-half weeks into the conflict (on 18 March), Powell repeated Fed projections of 2.4% growth this year with inflation rising to only 2.7%. Monetary policy, he said, was mildly restrictive but growth was solid with both wages and productivity rising. Fed policy, he said, was well balanced with little suggestion that inflation would trigger a rise in interest rates.
Vulnerable
Make no mistake Americans are vulnerable to economic slowdown. Fifty-two percent of Americans, according to Kevin Warsh, President Trump’s nominee to succeed Powell, own no financial assets. They are heavily indebted in a bifurcated economy with a widening gap between the rich and those less well off. In private household surveys, two-thirds of respondents say they live paycheck to paycheck.
Impressive job growth of 178,000 in March suggests that the Trump administration and Federal Reserve may be correct in saying the US economy is in good shape. But there is no denying that the Iran war has boosted inflationary pressure. And if the United States moves up the escalation ladder by sending ground troops into Iran, oil prices will rise further, increasing the risk of a global economic slowdown.
The views of the writer are not necessarily the views of the Daily Friend or the IRR.
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