War-Driven Oil Surge Strains U.S. Economy Despite
Stock Market Rally
Stocks may be soaring again, but the war
in Iran has started to pinch the finances of many Americans.
·
Market-economy disconnect: The
S&P 500 hit record highs even as the broader economy faces rising stress
from the Iran war.
·
Oil and fuel prices surge:
o
Brent crude near $100/barrel
o
U.S. gasoline averages ~$4.10/gallon (over $1
increase since war began)
·
Impact on households:
o
Higher fuel costs squeezing family budgets
o
Rising prices for groceries, air travel, and
housing
·
Economic risks growing:
o
Inflation likely to worsen
o
Unemployment projected to rise (up to ~4.6%)
o
Growth expected to slow
·
Policy expectations vs reality:
o
Donald Trump had expected a short conflict and
falling energy prices
o
War remains unresolved under a fragile cease-fire
·
Economists’ view:
o
Not “if” but how much the war will hurt
growth
o
Outlook depends heavily on U.S.-Iran peace
negotiations
·
Optimistic government stance:
o
White House says economy is strong and can absorb
temporary shocks
o
Treasury expects gas prices may fall to ~$3/gallon
if tensions ease
·
Federal Reserve dilemma:
o
Higher oil prices complicate balancing inflation
control and growth
o
May delay interest rate cuts
·
Best-case scenario:
o
Peace deal → oil prices fall → economic
pressure eases
·
Worst-case scenario:
o
Renewed fighting → disruption of oil supply
(e.g., Strait of Hormuz) → severe economic shock
·
Key takeaway:
The U.S. economy faces rising inflationary pressure and slower growth,
even as financial markets remain surprisingly resilient amid geopolitical
uncertainty.
Roughly
seven weeks into the war with Iran, investors have shrugged off the sky-high price
of oil, sending the S&P 500 this week to a fresh record high.
That
exuberance on Wall Street has offered a sharp contrast with the hardships facing
many Americans, who are feeling the financial blowback of a conflict that President
Trump once promised would be brief but seems to have no end in sight.
With
high gas prices cutting deeply into many families’ budgets, the U.S. economy is
under increasing strain, raising the odds that inflation will worsen, unemployment
will rise and growth will slow this year.
Under
Mr. Trump’s original timeline, America’s entanglement in the Middle East was supposed
to have been completed by now, paving the way for a swift reduction in energy costs
that have roiled consumers and businesses around the world.
Instead,
Mr. Trump’s war remains at a standstill, governed by a fragile cease-fire between
Washington and Tehran. Among economists, the persistent uncertainty means that it
is no longer a question of if, but rather, how much the standoff will come to impede
U.S. growth and worsen inflation.
For
many families and businesses, some of the economic toll exacted by the war is already
evident. The price of Brent crude, the world’s benchmark, once again hovered around
$100 per barrel on Thursday, while gasoline reached an average of about $4.10 per
gallon nationally, according to AAA. That is more than $1 per gallon higher than
before the war began.
The
energy surge has threatened to make airfares and groceries more expensive, while
raising costs for farmers and making it more expensive for Americans to purchase
a home. Yet Mr. Trump and his top advisers have continued to project confidence
about the nation’s economic outlook, while brushing aside the early signs of
damage.
“The
stock market is good, the oil prices are coming down, and it’s looking very good
that we’re going to make a deal with Iran,” the president told reporters on Thursday,
before later adding that gas prices are actually “not very high.”
The
comments marked a sharp turn from Mr. Trump’s own acknowledgment just days earlier
that prices at the pump might not retreat in time for the midterm elections in November.
At one point this week, the president also expressed surprise this week that the
economy — and the stock market — had not suffered far greater setbacks “in the midst
of everything” with the war.
“There
is a hit,” the president said in an interview on Fox Business earlier, “because
you know, we go through it for whatever it is, six weeks — there is going to be
a hit, but it’s going to recover, I think, fully somehow.”
Economists
have cautioned that it is difficult to measure the costs of an unpredictable war.
But they agree that the U.S. economy is at a crossroads, and that its trajectory
hinges on whether Washington and Tehran can reach a lasting peace.
By
Thursday, officials in Pakistan sought to host a new round of talks between the
two warring parties, but formal negotiations had not been announced. In a move that
could help facilitate discussions between the United States in Iran, Israel and
Lebanon agreed to a brief cease-fire. But the development came hours after Pete
Hegseth, the defense secretary, renewed a threat to bomb
civilian infrastructure in Iran if leaders there did not agree to a deal.
Offering
its latest snapshot of the costs of the war, analysts at Goldman Sachs predicted
on Sunday that the U.S. economy would grow more slowly, and prices would rise at
a greater clip, than it projected before the conflict. They also predicted that
the unemployment rate would reach 4.6 percent this year, up from 4.3 percent in
the latest federal gauge.
David
Kelly, the chief global strategist at JPMorgan Asset Management, said that the pressure
could eventually ease — and oil prices could plunge — if the war is “settled this
week with some sort of win-win solution.” He said that would entail the resumption
of safe oil shipments, particularly in the Strait of Hormuz.
But,
Mr. Kelly added, the economic shocks would be much greater if fighting between the
United States and Iran were to restart, especially if a return to military operations
affects energy infrastructure throughout the Middle East.
“Then,
you’ve got a more serious problem,” he said.
The
White House has declined to furnish detailed projections for the economy this year.
But Pierre Yared, the acting chair of the Council of Economic Advisers, said in
an interview this week that the United States had entered the war in a “very strong
situation,” and was “well positioned to withstand” a spike in oil prices that he
described as “temporary.”
“That
increase in the price can generate inflation while the price is rising, and then
once the conflict is over, you can have a reversal of that increase,” Mr. Yared
said.
But
the war has nonetheless created new political challenges for Mr. Trump, precisely
when he had been trying to convince Americans that his policies have improved families’
finances. This week, the administration had planned to tout its signature new tax
cuts in time for the April 15 tax filing deadline. Instead, the White House found
itself on the defensive about the economic toll of the war.
Appearing
at an event hosted by CNBC, Scott Bessent, the Treasury secretary, acknowledged
on Wednesday that the spike in gas prices could cut into Americans’ tax refunds,
which he described as more generous under Mr. Trump. Federal data suggest those
refunds are not as large as the White House once predicted.
Still,
Mr. Bessent stressed at a White House briefing that day that he believed gas prices
could fall to around $3 per gallon by the summer, adding that the timetable for
relief would hinge on the negotiations.
“I’m
optimistic that sometime between June 20 and Sept. 20 that we can have $3 gas again,”
he said.
The
risk of a protracted war also seemed to create new challenges for the Federal Reserve,
where policymakers appeared newly wary about future interest rate reductions now
that fear of inflation has intensified.
Thomas
I. Barkin, president of the Federal Reserve Bank of Richmond, acknowledged in an
interview on Wednesday that the war in Iran had created tension between the Fed’s
two goals of low, stable inflation and a healthy labor
market. He warned that a prolonged period of higher gas prices risked “putting a
squeeze on the consumer,” but he stressed that overall spending has held up well
so far, even as Americans seek ways to defray higher costs.
“The
oil price spike, like many supply shocks, is negative to both sides of our mandate,”
Mr. Barkin said. “You can convince yourself to lean in one direction or lean in
the other direction,” he said of the Fed’s interest rate decisions.
Despite
that uncertainty, Mr. Trump renewed his call for swift and steep rate cuts on Thursday,
as he and his aides dismissed the recent economic turbulence as a temporary setback.
At
an event hosted by the news organization Semafor, Kevin Hassett, the director of
the White House National Economic Council, insisted on Tuesday that the Trump administration
had made an “enormous amount of progress” on affordability.
His
comments came days after the government’s own inflation gauge showed a rise in prices,
driven by rising gas costs. Yet Mr. Hassett said he still believed the economy would
grow by about 4 to 5 percent this year, a faster clip than many of his peers have
projected.
“Right
now, I guess the question is, are we confident that the economy is going to be strong
this year? And we really are, because we have so many positive effects we’re seeing
in the data,” Mr. Hassett said.