Iran's War Raises Risks of U.S. Economic Recession and Pressures Expectations

SadaNews - Wall Street is lowering its expectations for the U.S. economy this year, while raising its estimates for inflation and unemployment and increasing the likelihood of a recession, as the repercussions of the war with Iran begin to materialize.

Goldman Sachs stated that the risk of an economic contraction over the next 12 months has risen to 30% due to rising oil prices, predicting that the unemployment rate will reach 4.6% by the end of 2026 compared to 4.4% in February. Several institutions also believe that inflation will approach 3% this year instead of 2%, which puts pressure on disposable income and limits job creation.

This represents a shift from previous forecasts that suggested 2026 would be strong, with the fading impact of Trump-era tariffs and the beginning of the impact of tax cuts.

Even if fighting ends soon, economists say that the damage already done will keep the U.S. economy in a fragile state, with low-income individuals and job seekers continuing to suffer.

Nancy Vanden Houten, chief economist at Oxford Economics, said: "Many elements of the economy will be weaker due to this war." She added: "The impact is evident and rapid. Just stop by your local gas station to see it."

Rising Prices Pressure Consumers

Tax refunds supported by the law dubbed the "Comprehensive and Beautiful Act" by Trump have helped mitigate the shock. However, forecasts are beginning to indicate that increased refunds, which were a key element in supporting consumer spending expectations for 2026, will be effectively neutralized by rising energy costs.

Gas prices have risen by more than 30% since the beginning of this month, reaching nearly $4 per gallon, according to the American Automobile Association, marking the largest increase since Hurricane Katrina disrupted oil production in the Gulf Coast in 2005.

Meanwhile, preliminary data on tax refunds came in below expectations. In a report dated March 23, economists at Morgan Stanley estimated that refunds rose by only 12% compared to last year, which is lower than the expected increase of 15% to 25%. The bank also lowered its consumer spending growth forecast, expecting a growth of 1.7% in 2026 instead of 2%.

Arunima Sinha of Morgan Stanley stated in an interview: "The oil shock is effectively wiping out that increase we were counting on."

Fragile Growth Reliant on Artificial Intelligence

This places the U.S. economy on a growth path of around 2% in 2026 according to most estimates, largely supported by ongoing investments in data centers, which are seen as less affected by rising imported energy costs, owing to the abundance of low-cost natural gas in America.

However, this makes the economy highly dependent on the continued optimism of investors regarding artificial intelligence, and related spending by high-income earners whose growing investment portfolios support ongoing economic expansion, despite weak job growth in 2025.

Oil prices have decreased slightly amid U.S. diplomatic efforts to end the war with Iran, although Brent crude remains above $100 a barrel.

Even if a deal is reached soon, analysts warn that the resumption of oil shipments through the Strait of Hormuz will take time. Additionally, damage to oil infrastructure in the region, along with rising global demand as inventories are rebuilt following the war, will keep prices elevated above pre-conflict levels.

Inflationary Pressures Extend to Food and Transportation

American consumers are already feeling the effects when purchasing gasoline or airline tickets. The war-related fertilizer shortages are expected to drive food prices higher as the year progresses.

Rising diesel fuel prices, which have climbed faster than gasoline, will contribute to increased shipping costs, potentially leading to a widespread rise in consumer goods prices that have already increased due to tariffs.

Jennifer Lee, chief economist at BMO Capital Markets, stated: "Everyone is very concerned about how long it will take for conditions to stabilize." She added: "Even if the crisis were resolved today, restoring production would take a long time."

Many economists believe that declining spending will translate into a decrease in employment, meaning another year of weak job growth, after 2025 recorded the lowest employment growth during an economic expansion.

The Labor Market Under Pressure

Several Wall Street institutions, including Citigroup, expect an increase in the unemployment rate this year. This is one of the reasons many of them are sticking to forecasts that the Federal Reserve will resume cutting interest rates at some point in 2026, despite investors recently betting on interest rate hikes.

Gisela Young, an economist at Citi, remarked that the slowdown in job growth may further affect consumer spending. She added: "If job growth continues to slow, which is already near zero on average, it could create additional pressure on the consumer." She also noted that the bank expects wage growth to slow again this year.

However, initial indicators appear more mixed compared to the rapid deterioration in forecasts. Economists at JPMorgan Chase and Bank of America state that the internal weekly data on credit card spending shows no strong signs of a slowdown as of mid-March, indicating that consumers have not yet begun to cut back on their spending despite rising costs.

The University of Michigan is set to release the final results of its monthly consumer confidence survey on Friday. Analysts expect the survey to show a decline in March, according to the average estimates in a Bloomberg poll, but it will not reach the level recorded in November, which was the lowest in more than three years.

Michael Feroli, chief economist at JPMorgan, stated: "During the first two weeks of the conflict, we do not see sharp changes in consumer spending." However, he added: "I think this somewhat dampens the momentum of economic expansion."