U.S. Attack on Iran Injects Uncertainty Into an Already Uncertain Economy
On-and-off trade battles, hot wars and deportations make it tough to predict where the U.S. economy is headed. “There is too much risk on the table right now.”
Recent gyrations in policy and global events have left economists and consumers in a state of confusion. On Monday night, just hours after Iran’s retaliatory strike on a U.S. base and while talk of regime change was still in the air, President Trump announced a cease-fire deal between Iran and Israel.
Add the geopolitical whipsaw to Trump’s on-again/off-again tariff plan and to deportations that sparked mass protests and spooked the hotel and agriculture industries. Businesses have slowed hiring considerably, partly out of concern about tariffs and rising costs, but they aren’t engaging in big layoffs and the unemployment rate remains low. Even the Federal Reserve, the steward of the U.S. economy, is torn on where things are headed and whether to cut interest rates.
“If you were to ask me, give me a description of the United States economy, it’s ‘pervasive uncertainty,’” said Joe Brusuelas, chief economist at RSM, an audit, tax and consulting firm. “There is too much risk on the table right now. We just don’t know in which direction we are truly headed.”
Nick Bloom, an economics professor at Stanford, oversees an index that tracks economic uncertainty in the U.S. and globally, based on the number of news articles expressing the sentiment. Readings in recent months have soared, hitting quadruple the long-running average, he said.
“The Iranian conflict will fit exactly in this, this kind of deluge,” Bloom said. “Every theater of economics and politics seems to be impacted by political and economic uncertainty.”
The danger of that is if it hampers investment and hiring, he said. “If you are running a business or you are thinking about going out and buying a car or buying some new clothes, if you are uncertain about the future, you pause,” he said.
Economists said they were encouraged by the conflict’s muted impact so far on oil prices. U.S. benchmark crude started climbing after Israel began bombing Iran on June 13 but has turned down, falling 7% Monday to $68.51 a barrel.
Despite threats, Iran hasn’t blocked tanker traffic in the Strait of Hormuz, through which about 20% of the world’s oil supply flows, according to the U.S. Energy Information Administration.
A conflict that did cause oil prices to surge would risk igniting another round of inflation at a delicate time for the U.S. economy. A 10% rise in oil prices would cause the core components of the Federal Reserve’s preferred inflation gauge, the personal-consumption-expenditures index, to rise by 0.04 percentage points, according to analysis by Goldman Sachs.
The bank also estimates that a $10 per barrel increase in oil prices would lower U.S. GDP growth by 0.1 percentage points, after balancing the drag on consumption against the economic boost from investment in the energy sector.
Trump has badgered the Federal Reserve to cut interest rates, arguing that the Fed is needlessly inflating federal borrowing costs. Any new hints of inflation heating up again could make it harder for the Fed to justify a rate cut in the months to come.
On Monday, Trump cautioned against hikes in oil prices. “Everyone, keep oil prices down,” he wrote on social media. “I’m watching. You’re playing right into the hands of the enemy.”
The U.S. economy isn’t as vulnerable to Middle Eastern conflict as it was during the Arab oil embargo of the 1970s. The shale-oil boom of the last 15 years has turned the United States into the world’s biggest oil producer, which means that some parts of the country even benefit when prices rise. Canada, Brazil, Guyana and others have also risen as more prominent producers.
“There has been a slow but consistent shift over time in the locus of oil production in the global economy that has really changed the historic association between dynamics in the Middle East and the oil price,” said Cullen Hendrix, a senior fellow at the Peterson Institute for International Economics. Higher global demand for renewable energy and weaker economic growth in China should also act as a brake on oil prices, he added.
Still, the potential for escalation in the conflict with Iran adds uncertainty to an economic outlook that was already confusing many economists and consumers.
As of late last year the Federal Reserve appeared to be close to finally taming inflation after a more than two year fight, a glide path that Trump disrupted with a flurry of import tariffs as soon as he took office.
Most economists expect tariffs to lift prices over the coming months, causing new handwringing at the Fed about how quickly to cut rates.
The timing for rate cuts “could come quickly. It could not come quickly,” Chair Jerome Powell said last week. “We feel like we’re going to learn a great deal more over the summer on tariffs.”
Rate projections released last week revealed a widening divergence among the 19 Fed policymakers who gather roughly every six weeks to set rates. While 10 of them penciled in at least two rate cuts this year, the number of officials who think the Fed won’t cut at all this year rose to seven, from four in March.
Write to Jeanne Whalen at Jeanne.Whalen@wsj.com
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