US strikes on Iran could hit American economy at a fragile time

USA Today

3 hours ago

The U.S. attack on Iranian nuclear sites over the weekend could ratchet up the pressure on an American economy that's turned increasingly fragile as a weekslong global trade war takes a toll.
America's entry into what had been attacks between Israel and Iran is most likely to impact oil prices, investors said, which could ripple through the economy by causing higher transportation and gas prices, just as overall inflation throughout the economy has seemed to be contained.
Energy analyst Rachel Ziemba told USA Today on June 22 oil prices may not trade much higher until and unless there's a sustained supply shock, like Iran deciding to block the crucial Strait of Hormuz. Iran's parliament on June 22 reportedly approved a measure endorsing exactly that, though whether it happens comes down to Iran's Supreme National Security Council.
Ziemba calls that a 'low probability, high impact' risk – and one that commodities traders will likely struggle to price. That means energy prices may be volatile until conditions settle down – even as summer vacations start in earnest and a massive heat wave grips the central and eastern parts of the country.
Any shock to financial markets and disruption of American consumers' expectations for the summer months comes as the overall economy is weakening quickly.
"The world economy is not in a strong position to absorb another energy shock," warned Nigel Green, chief executive of deVere Group, a financial advisory firm. The U.S. joining the conflict between Israel and Iran raises the risks of a "sharp, global reaction," Green added.
'Investors are currently positioned for rate cuts, stable energy prices and an orderly global outlook," he said in a June 18 note. "A sudden and serious expansion of this conflict would force a violent repricing of risk across all major asset classes.'
On June 18, the Labor Department reported that claims for unemployment insurance continued to rise.
'Uncertainty is leading companies to trim staff ahead of what could be a downturn in the economy. Batten down the hatches is what company executives are saying as the trade war and rumors of real war are starting to take a toll on the business outlook,' said Christopher Rupkey, chief economist with market research firm FWDBONDS LLC, in an email.
Analysts at Oxford Economics take a more benign view.
'Rising Middle East tensions represent another adverse shock to an already weak economy,' they wrote on June 18. Their models suggest that oil prices at about $130 a barrel would pressure inflation to 6%. Post-pandemic inflation peaked at 9.1% in June 2022.
That would put the Federal Reserve in a difficult position. The Fed raises interest rates to tame inflation, and cuts them to support borrowing and economic growth. So far this year, the central bank has held rates steady as it waits to see more information about how tariffs are playing out in the economy, but that may change.
Federal Reserve chair Jerome Powell, speaking after the central bank held interest rates steady for the fourth consecutive meeting on June 18, told reporters the Fed is watching the situation in the Middle East, "like everybody else is."
"What's tended to happen is when there's turmoil in the Middle East, you may see a spike in energy prices," Powell said prior to the U.S. strikes. "Those things don't generally tend to have lasting effects on inflation, although of course in the 1970s, they famously did, because you had a series of very, very large shocks. But, we haven't seen anything like that now."
The U.S. economy is far less dependent on foreign oil than it was back in the 1970s, Powell added.