Will the ongoing conflict in Iran undo the economic growth seen during President Donald Trump’s administration in the 1980s, pushing the country towards a situation similar to the stagflation of the 1970s? That’s, of course, dependent on the length of the war, which the president believes he can shorten. But, it’s interesting to consider—what if this escalates into a prolonged conflict?
Right after President Trump initiated airstrikes in Iran, there was an immediate market downturn, particularly impacting growth sectors such as AI. In addition, silver prices dropped significantly. Bonds fell as well, and even gold saw a near 3% decrease, indicating a shift towards the dollar amid rising recession fears.
Notably, crude oil prices surged by 10% in just two days, jumping from $67 to $74 per barrel and reaching $86 as of now.
Markets tend to react swiftly, though there are times they might overreact. The major concern for the overall economy is the length of disruption to Middle Eastern oil exports during this conflict.
Interestingly, Chuck Schumer, who previously blocked efforts to fill the nation’s oil reserves under Trump, is now advocating for their release.
About 20% of the world’s oil exports navigate through the Strait of Hormuz, which Iran borders. Moreover, another 30% falls within the range of Iranian missiles in the Gulf of Oman and the Red Sea.
Now, while the U.S. doesn’t import much Middle Eastern oil—only around 2% of its consumption—global markets are interconnected, meaning any instability in the Middle East is likely to push prices higher worldwide.
The initial assault led to a staggering 70% decline in shipping traffic through the Strait of Hormuz, according to Marine Traffic. By March 3, operations had completely halted, as reported by Lloyd’s List.
In response, President Trump instructed the U.S. International Development Finance Corporation to extend political risk insurance and financial guarantees for maritime operations in the Persian Gulf and Strait of Hormuz, mitigating risks for shippers. Yet, traffic isn’t expected to return to normal until the conflict wraps up.
Trump mentioned the war might conclude in about four weeks, but there’s also been messaging suggesting it could take as long as necessary.
While some may view the promise of a lengthy war as a strategy to undermine the morale of the Iranian regime, public sentiment appears to lean towards minimal involvement. Recent polls indicate that approval for military actions lasting less than eight weeks stands at +52, while actions longer than that dip to -8. More American casualties could further negatively affect public opinion.
In terms of economic implications, an enduring conflict will likely produce tangible negative outcomes across three key areas: growth, employment, and inflation.
Historically, a $10 rise in oil prices correlates with a decrease in economic growth by about 0.1%. While that may seem minor in a thriving economy, particularly one growing at over 3%, a $19 increase in oil prices could impact annual wage growth considerably.
Gas prices have already seen a nearly 20% uptick, escalating from $2.98 to $3.56. Together, costs related to fuel, transport, and utilities could push inflation up by another 0.6%, potentially adding another $500 to household budgets.
The convergence of high oil prices and slowing economic growth could stymie job creation, with losses possibly reaching 15,000 to 20,000 jobs monthly, should trends continue.
However, despite the immediate financial strain, this situation isn’t necessarily indicative of a recession. Instead, it’s the protracted nature of conflict that historically drags economies down. A Deutsche Bank study indicates that it would require sustained oil price climbs of 50% to 100% to trigger a recession, implying that oil prices need to rest between $100 and $150.
Critically, the impact of oil prices typically manifests only when the economy shows signs of decline. For instance, the 1970s oil crisis struck when the U.S. economy was already in stagflation due to expansive spending policies. This deviates significantly from the current context where the Fed reported a healthy 3% GDP growth rate and a remarkable productivity rate of 4.9% at the bombing’s onset.
In this climate, a spike to $100 oil could slip growth to around 1%. But, unless there’s panic and the Fed opts to hike interest rates, a recession seems unlikely at this point.
Ultimately, the war’s most visible effect has been on oil prices. However, if it drags on, higher oil prices could cascade through growth, employment, consumer spending, and inflation—potentially igniting a detrimental cycle of interest rate hikes.
This sequence of events could force Trump to relinquish the economic gains achieved right before midterm elections poised to swing control to Democrats, ushering in a period of stagnation marked by Congressional gridlock and renewed investigations.
