Iran War Threat Adds Fresh Uncertainty to U.S. Economic Outlook

Just weeks before the first U.S. strikes on Iran, the International Monetary Fund described the American economic outlook as "buoyant." Thirty days of war later, Goldman Sachs raised the odds of a U.S. recession within the next 12 months to 30%, oil surged above $100 a barrel, and the cost of borrowing to buy a home jumped by more than half a percentage point.

The numbers arriving nearly one month after hostilities began on Feb. 28 painted a consistent picture of an economy absorbing a significant new shock. Brent crude, the international benchmark, rose 1.4% on Thursday to $101.89 amid fresh signs of escalation, while benchmark U.S. crude climbed 4.5% to $94.43 per barrel. Measured against prices at the start of the conflict, oil was up roughly 40%.

Those energy costs filtered quickly to the pump. According to GasBuddy's live tracker, a gallon of unleaded gas averaged $3.64 nationally, about $0.72 higher than the previous month's average. The national average had risen by roughly $1 since the start of the war, a surge that cut across the broader economy.

"The Iran war acts like a tax increase on the consumer, except nobody voted for it," said Dietrich, an economist.

The pain was not confined to the gas station. Mortgage rates tracked sharply higher alongside rising Treasury yields. The average rate on a 30-year fixed mortgage stood at 6.41%, according to Mortgage News Daily, up from 5.9% right before the U.S. attacked Iran. On Wall Street, the Dow, NASDAQ, and S&P 500 were each down more than 5% since the war started.

Goldman Sachs analysts estimated that higher global energy prices would boost U.S. inflation by 0.2 percentage points to 3.1% by year-end, dragging on consumer spending and economic growth. That forecast arrived against a backdrop of relatively stable February inflation data, which showed price growth had remained steady over the previous month before the conflict began.

The inflation concern carried its own secondary risk. Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co., warned that "there are still inflation embers in the U.S. economy, and an increase in energy has the potential to raise inflation expectations," adding this "may cause [interest] rates to have to go higher to tamp down inflation."

Not all analysts shared Goldman's alarm. One economist said the impact from the Middle East remained "quite limited" and put recession odds at just 10%. But even more cautious voices acknowledged the range of possible outcomes had widened considerably.

"The tail risks have certainly increased," said Christopher Hodge, chief U.S. economist at Natixis CIB Americas. Hodge outlined scenarios spanning a rapid resolution, in which the remaining Iranian regime showed "limited military capability or desire to strike back" and oil price effects faded quickly with "relatively little economic fallout or change in things like Fed rate expectations," all the way to a prolonged conflict that could upend global supply chains.

The conflict also complicated the seasonal tailwind that tax refund season typically delivers. Each spring, Americans use refund payments to pay down debt, make large purchases, and build savings, creating a meaningful jolt to consumer activity. Experts said the war's economic disruption threatened to absorb or cancel that boost entirely.

Consumer spending accounts for roughly two-thirds of U.S. economic activity, and the threat of sustained energy costs ran unevenly through income brackets. "Lower-income households get squeezed by fuel costs, while higher-income households can also get hit if the stock markets hit their asset values and stock market gains," Dietrich said.

The broader institutional picture had been more optimistic before hostilities began. A Conference Board survey showed CEO confidence in the U.S. economic outlook had jumped, yet nearly 60% of those executives flagged geopolitical tensions as a high-risk disrupting force. That cautious undercurrent has since been validated by events, including reports that the Strait of Hormuz remained blocked and deliberations in Washington over whether to extend a pause on strikes targeting Iranian energy infrastructure.

Whether the economic fallout proves temporary or persistent depends almost entirely on the war's trajectory. A swift resolution, Hodge's Natixis team argued, could leave the Fed's rate path largely intact. A drawn-out campaign would not offer that comfort.