Conflicts in Iran could cause economic instability if the war drags on for too long
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Will the Iran war turn President Donald Trump’s 1980s into the stagflation of the 1970s? Only if it drags on, the president says he plans to avoid it. But the enemy gets the vote, as the saying goes, what if it is a long conflict?
As soon as Trump started attacking Iran, the markets fell – especially growth stocks like AI. Silver is dead. Bonds fell. Even gold is now down about 3%, having reversed its initial battle with the terrifying flight to the dollar that you saw in the recession.
Oil jumped 10% in two days, from $67 to $74 a barrel on its way to $86 as of writing.
Markets always react quickly – and can overreact. The broader economic question is how long the war disrupts oil exports to the Middle East.
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Thick smoke rises from an oil storage facility hit by a US-Israeli strike late Saturday in Tehran, Iran, Sunday, March 8, 2026. (Vahid Salemi/AP Photo)
About 20% of the world’s oil exports pass through the narrow Strait of Hormuz near Iran. Another 30% are listed as Iranian missiles in the Gulf of Oman and the Red Sea.
The US actually imports almost none of this – Middle Eastern oil is just 2% of US oil consumption. But oil markets are global, so disruptions in the Middle East drive up prices around the world.
In the first attack, shipping in the Strait of Hormuz dropped by 70%, according to MarineTraffic. On March 3, it reached “total suspension,” according to Lloyd’s List.
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Trump then ordered the US International Development Finance Corporation to provide political risk insurance and financial guarantees for maritime trade through the Persian Gulf and the Strait of Hormuz.
This will help remove risk from the sender. But traffic is unlikely to fully recover until the end of the campaign.
Trump is currently suggesting that the war could last as little as four weeks. But the administration also sent messages that the war would go on “as long as it takes.”
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Promising a long war would be strategic, to destabilize the Iranian regime. But opinion polls show that Americans have very little desire for a long war.
A recent CBS poll found that a war lasting less than eight weeks is +52 in the polls, while a war lasting longer is -8. The polls will be worse if the Americans turn up.
In the first attack, shipping in the Strait of Hormuz dropped by 70%, according to MarineTraffic. On March 3, it reached “total suspension,” according to Lloyd’s List.
Economically, there will be a real fall only if the war continues. And that goes into three baskets: growth, jobs, and inflation.
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Historically, every $10 oil increase has reduced economic growth by about two-tenths of a percent. That’s less in an economy that’s growing at more than 3%, according to the Fed’s GDPNow. It could reduce annual wage growth by about $300, as $19 oil has already risen.
Still, that’s on top of the expensive fuel to heat your home or gas your car. AAA says gasoline prices have already increased nearly 20%, from $2.98 to $3.56. Between fuel, transport costs and utilities that would reduce inflation by another six to ten percent – which translates to another $500 in household costs.
Meanwhile, higher oil prices and slower growth have both affected job creation – judging by the moves we’ve already seen it could reduce job creation by 15,000 to 20,000 per month.
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Heavy fire and plumes of smoke are seen after, according to authorities, debris from an Iranian drone that was captured crashed into the Fujairah oil facility, in Fujairah, United Arab Emirates, Tuesday, March 3, 2026. (Photo by Altaf Qadri/AP)
So it hurts. But it’s not a recession.
What will get us into trouble is a long war. A recent study by Deutsche bank looked at historic oil shocks, concluding that you need a 50% to 100% oil jump to trigger a recession.
This would mean that oil prices between $100 and $150 remain high.
Even then, according to Deutsche, oil only causes recession when the economy is already faltering. For example, the 1970s is the poster child for the oil crash. But the US economy was already on the brink of collapse thanks to Washington’s so-called guns-and-butter policy against Vietnam while building a trillion-dollar welfare state. This prompted the “Nixon Shock,” which predated the oil embargo by several years.
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In contrast, when the bombs started, the Fed’s GDPNow was at a healthy 3% of GDP growth and the latest output was 4.9% – one of the highest since the Reagan administration.
This means that $100 oil can put us in a 1% growth zone. But it is unlikely to trigger a recession unless the Fed panics about oil inflation and raises prices. Which could cut enough jobs to get us off the brink.
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At the moment, the biggest impact of the war is oil prices. But if the war continues and oil falls on growth, jobs, consumer spending and inflation that could start a Fed hike doom loop.
If that happens, Trump may be throwing away his hard-earned boom during the midterm elections that hands Congress to Democrats. Who will take us on a two-year journey of disability, congressional hearings and repeated impeachment.
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