And this abstracts from what Americans will need to shell out for higher prices on everything from groceries to airfares in the coming weeks and months. The financial pain caused by the war and its fallout on consumer spending and the economy is set to intensify.
Unfortunately, those refunds are set to tail off over the next few weeks, but it doesn’t look like gasoline prices will return to pre-war levels anytime soon. That’s even if the war ends soon, which looks iffy, to say the least.
Fortunately, cushioning the financial blow are bigger tax refunds associated with the deficit-financed tax cuts provided by the One Big Beautiful Bill Act. To date, those bigger refunds have totaled $47.1 billion.
The economic damage from the war with Iran is mounting. Just the surge in gasoline prices has cost Americans an estimated additional $21.3 billion since the start of the war over 6 weeks ago.
The only thing working in consumers’ favor has been the bigger tax refunds provided by the OBBBA, but that will fade quickly on the other side of Apr 15. At the same time, the economic headwinds from the war are just beginning to blow. My angst around the possibility of recession continues to rise.
With job growth stalled, sentiment slumping, high and accelerating inflation cutting into real incomes, the stock market going sideways, and higher interest rates, it isn’t hard to see consumers pulling back.
Real consumer spending growth in recent months has been barely 1% annualized, and that’s despite a decline in the personal saving rate to a very low 4%.
Last week’s economic data show just how fragile the economy is, even before the fallout from the Iran war hits with full force. Critical to whether the economy can avoid a recession is whether the consumer holds tough, and that looks increasingly iffy.
The VCI is a labor force–modified Sahm rule. To understand why it may be sending a stronger recession signal than the standard measure and what it says about today’s labor market read the short explainer in my latest newsletter: lnkd.in/ekCyK38S
Recession risks thus remain uncomfortably high, with close to even odds of a downturn in the coming year. So says our leading recession indicator, which is based on a random forest model that I recently posted about. And so too says our new, tentatively dubbed Vicious Cycle Index (VCI).
Abstracting from the vagaries of the monthly data, few jobs have been added since Liberation Day a year ago, and without healthcare, the economy would be losing jobs. And all of this before the economic fallout from the hostilities with Iran hits.
Don’t take solace in the big March payroll employment gain. It comes after a big decline in February, when brutal winter weather and a labor strike at Kaiser Permanente weighed heavily on jobs.
Based on simulations of our global macroeconomic model, oil prices would only need to average close to $125 per barrel in the second quarter of this year. With tensions still elevated, that’s not a stretch.
This still isn’t a recession, but given how fragile the economy was even before the conflict began, not much else would have to go wrong in the Middle East to precipitate a downturn.
In our forthcoming April forecast, while still tentative, we are set to increase our oil price forecast for the year by at least another $10 per barrel, with prices peaking near $95 per barrel on average in the second qtr. This will cut an additional 15 basis point from real GDP growth in the year.
Between our February forecast, done a few weeks before the conflict began, and our March outlook, done at the start of the hostilities, we raised our 2026 oil price forecast by nearly $15 per barrel. This lowered our expectations for real GDP growth for the year by close to 20 basis points.
With tenuous prospects for resolving the conflict with Iran, and financial markets under pressure, recession probabilities are high and rising. We don’t yet anticipate an outright downturn in our baseline (most likely) outlook for the economy, but we’ve been aggressively marking down our forecast.
However, if oil prices remain elevated for much longer (weeks and not months), a recession will be difficult to avoid.
Despite mounting evidence that the economy is struggling and recession risks are high, economists will be loath to utter the word 'recession'. Many were sure a downturn was imminent in the wake of the Fed’s monetary tightening a couple of years ago, vocally said so, but were wrong.
Oil prices are an important variable in the model, with good reason: every recession since WWII, save the pandemic, has been preceded by a spike in oil prices. Higher oil prices don’t do the same economic damage as in years past, as we produce as much as we consume, but consumers still get hit hard.
Behind the recent jump are primarily the weak labor market numbers, but almost all the economic data have turned soft since the end of last year.
It isn’t a stretch to expect the indicator to cross the key 50% threshold amid the Iranian conflict and the resulting surge in oil prices.
Recession is once again a serious threat. Even before the recent disconcerting events in the Middle East, our machine learning based leading economic indicator model put the probability of a recession starting in the next 12 months at an uncomfortably high 49%.
The escalating conflict involving Iran is sending shockwaves through energy markets. Oil prices are swinging amid concerns about disruptions to the Strait of Hormuz. Even temporary disruptions could have significant consequences.
Join us for a live webinar: events.moodys.com/the-iran-oil...
Judging from this scatterplot, AI is already weighing on the job market, but we know this is due to weaker hiring, not layoffs. But if businesses believe there is no going back on AI, and cut workers as Block did, outright job losses appear increasingly likely.
Of course, AI could be a smokescreen for other, less flattering reasons for the cuts, but I suspect not. And even so, it may not matter for the job market, as the jump in Block’s stock price signals to other companies that they will be rewarded if they follow suit.
Businesses appear to be nearing a Cortes moment with artificial intelligence. That’s my takeaway from fintech company Block’s move to slash its workforce by 40%. While Block didn’t explicitly pin the cuts on AI, it all but did.
If you felt like last week was an economic whirlwind, you weren’t wrong.
Jared Bernstein and Jim Parrott joined #InsideEconomics to sort through the SCOTUS decision, GDP numbers, and what AI, housing, and jobs say about the economy.
Econ nerdfest — and worth it.
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Markets risk moving in a big way, causality is reversed, and falling asset prices threaten an already vulnerable economy. This is one of those times.
I rarely weigh in on financial markets, as they generally reflect and are broadly consistent with economic conditions. But there are times when I feel markets are overdone and increasingly disconnected from the economy.
The catalyst could be the nation’s massive budget deficits and funding needs, and global investors’ legitimate concerns about the safe-haven status of Treasuries in a fast de-globalizing economy.