Three types of events have plunged the United States into recession in the past: financial crises, oil price shocks, and pandemics.
The US and Israeli attacks on Iran have already brought about the second circumstance on this list and, if things go badly, possibly the first.
Much will depend on how long the conflict lasts and how serious it remains. The impact has grown as strikes have spread beyond Iran, shutting down airports across the Middle East and damaging industrial facilities. If there is a ceasefire next week, trade flows could return to normal relatively quickly.
But if the bombs continue to fall for several more weeks or months – as President Trump has predicted – the economic burden could become much greater and the costs to U.S. taxpayers much greater. Here are the main channels through which Americans could feel the impact.
Choke oil supplies
In the days after the war began, tankers stopped entering the Strait of Hormuz, which is controlled by Iran and through which 20 percent of the world’s oil flows. According to Lloyd’s List, about 200 ships are stranded in the Persian Gulf region and oil shipping rates have skyrocketed. Saudi Arabia’s largest oil refinery and Qatar’s largest liquefied natural gas export facility have been closed following drone attacks.
Oil prices have soared, rising about 15 percent since the fighting began, with the international crude oil benchmark at about $83 a barrel. According to AAA, diesel prices rose to an average of well over $4 per gallon, the highest level since late 2023. According to GasBuddy, the average price of gasoline rose to $3.25 per gallon from $2.99 last week. Even if the fighting stops, oil prices will remain high for the rest of the year, Goldman Sachs estimates, and if the strait remains closed for weeks they could reach $100 a barrel.
Of course, this is not the 1970s, when unrest in the Middle East led to fuel shortages that sent inflation soaring and led to queues at gas stations. The U.S. economy has become less dependent on oil due to the rise of wind and solar power, as well as the shale boom that has made the United States a net energy exporter. Some American gas companies have already tried to take advantage of higher prices.
Inflation is expected to rise, reducing the likelihood that the Federal Reserve will cut interest rates in the coming months. As usual, smaller companies are more exposed to volatile prices because they cannot afford long-term contracts or financial instruments that protect them from fluctuations.
“Any type of industrial company is going to hedge all of its energy risk,” said Chris Hodge, chief U.S. economist at Natixis Corporate & Investment Banking. “The cost of hedging will increase somewhat, but it is unlikely to hinder any investment plans.”
The same applies to consumers: those with low incomes tend to spend a higher proportion of their earnings on gasoline. When prices per gallon rise, people cut back on other priorities. With the personal savings rate at its lowest level in more than three years and delinquency rates on credit cards and auto loans rising to levels not seen since the Great Recession, there isn’t much cushion left.
Retailers and restaurants that serve low-income customers, as well as suburban consumers who have to drive everywhere, are most at risk, said Michael Gunther, senior vice president of research at Consumer Edge, a credit card data company. He expects the spending gap between low earners and high earners to widen, as was the case in 2022 when inflation topped 9 percent.
“If there is a general inflation shock and gas prices have risen sharply even then, that difference has really exploded,” Mr Gunther said. “It’s not like spending has fallen off a cliff, but it has definitely moderated compared to before.”
Trade conflicts
The Strait of Hormuz is not a major transport route for goods other than oil. And although transiting the entire region is now riskier, trade had already shifted from the nearby Suez Canal in recent years due to the threat of attacks from Houthi rebels, limiting the immediate downside.
However, without the outbreak of new hostilities, conditions might have improved.
“Rather than leading to a new, disruptive diversion of container shipping, the conflict will primarily postpone plans for shipping companies to return to the Suez Canal trade route later this year,” Simon MacAdam, deputy chief economist for global economics at Capital Economics, wrote in a note on Wednesday.
There is also uncertainty about whether the war will expand and disruptions will continue as U.S. consumer goods companies buy raw materials ahead of the holiday shopping season. In addition to the tariff landscape being upended again as Mr. Trump rushed to replace tariffs invalidated by the Supreme Court, the war is further clouding importers’ decision-making.
“We’re in that small window of time right now where any major impact can have a significant impact on consumers’ holiday season later in the year,” said David Warrick, executive vice president at Overhaul, a company that helps clients manage supply chains.
Risk on top of risks
There is never a good time to start an open-ended war. In this case, the United States is already suffering from a high debt burden, an economy that is heavily dependent on one sector, and a stock market that appears overvalued.
Despite several years of healthy growth and low unemployment, deep tax cuts and heavy spending during the pandemic have left federal debt relative to gross domestic product at historic highs. Due to high interest rates, the costs of servicing the borrowed money have exploded. After the attacks began, investors sold U.S. Treasury bonds instead of turning to them, as they typically do in times of global instability.
“Foreigners are beginning to doubt whether we are a reliable debtor,” said Desmond Lachman, resident fellow at the American Enterprise Institute. “The last thing you need is military action, which will likely require more defense spending.”
Economic growth, meanwhile, has been driven disproportionately by investments in artificial intelligence data centers and the complex equipment they house – much of which is transported from Asia along newly dangerous and expensive trade routes.
If investors lose confidence in the ability of some technology companies to deliver on their promises, stock markets that have been heavily focused on their stocks could suffer a setback. Since people profiting from this stock boom have been boosting consumer spending for months, a sharp downturn could quickly lead to layoffs.
“All things considered, there is a risk that this could cause a lot of trouble,” Mr Lachman said.