As tensions rise in the Middle East and several states struggle with the effects of devastating hurricanes, the U.S. economy is suddenly facing a new and potentially damaging crisis.
These events have given U.S. policymakers confidence that they have successfully controlled inflation without sending the economy into recession, and polls and consumer surveys have shown that Americans’ bleak economic mood is beginning to improve. This happened just as I was hinting at it. But after just a week, new risks emerged.
The economy now faces the prospect of soaring oil prices and the aftermath of a storm that could cause more than $100 billion in damage across large swathes of the Southeast. Economists are also tracking the potential impact of the longshoremen’s strike, which was called off Thursday night.
“New uncertainties are emerging,” said Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics. “If oil production declines in the Middle East and ports stop functioning, both will lead to inflation.”
That uncertainty comes weeks before a presidential election in which the economy, and inflation in particular, is one of voters’ top concerns, and after the Federal Reserve began cutting interest rates for the first time in more than 20 years. It has arrived in less than a month. expensive. The central bank is increasingly confident that inflation is returning to its 2% target, but is wary of weakening labor markets.
Even before the new risks emerged, the International Monetary Fund predicted that the U.S. economy would slow next year.
The escalation of the Middle East conflict is the most worrying scenario for the global economy. Economists have been warning for nearly a year that fighting between Israel and Hamas in the Gaza Strip could turn into a regional war, triggering an oil price shock and reigniting inflation around the world.
The World Bank said last October that the worst-case scenario would be similar to the 1973 Arab oil embargo during the Arab-Israeli war. A severe disruption could take up to 8 million barrels of oil per day from the market and push prices up to $157 per barrel.
Oil prices rose more than 8% this week after Iran fired nearly 200 missiles at Israel, which announced retaliation. Prices soared Thursday after President Biden said, “We’re talking about it,” when asked if he supported an Israeli attack on Iranian oil facilities. I think that’s a bit…in any case. ”
Economists are considering updating their forecasts and are closely monitoring developments.
“As long as conflicts remain contained in the Middle East, the main impact on the U.S. economy is likely to flow through energy prices,” said Michael Feroli, chief U.S. economist at JPMorgan.
Analysts at Capital Economics said on Wednesday that Iranian crude oil accounts for just 4% of the world’s supply, but disruptions to production could have a significant impact on prices. That trend could be exacerbated by disruptions in the Strait of Hormuz, through which much of the region’s oil and gas is transported.
But they suggested Saudi Arabia could increase production to make up for losses in Iranian oil, and oil prices would have to rise to $90 from the current level of about $75 for the central bank to start worrying about inflation. He said it is likely necessary.
“How long this situation lasts is also important to really move central banks on course,” David Oxley, chief climate and commodity economist at Capital Economics, said in a briefing. “If that were to happen, hostilities would likely escalate further.”
Omile Sharif, founder of Inflation Insights, said that as a rule of thumb, a $10 increase in the price of a barrel of oil translates into a 24 cent increase in the price of a gallon of gasoline, which in turn leads to monthly inflation increases. Ta. The Consumer Price Index is measured in 0.3 percentage points.
“This could lead to secondary effects such as higher airfares and higher diesel prices that push up the prices of some goods, but it will take a significant and sustained oil “We would need an increase in that amount,” he added.
Additionally, there are economic concerns in the United States due to the effects of Hurricane Helen.
Damage and economic losses from the storm, which dumped more than 40 trillion gallons of rain, could total between $145 billion and $160 billion, according to AccuWeather. This could hurt consumer spending in states such as Alabama, South Carolina, Georgia, Florida, North Carolina, Virginia and Tennessee.
There is also the possibility that government revenues may temporarily slow down. The Internal Revenue Service is offering tax breaks to businesses and individuals in hurricane-affected areas.
Storms tend to have little impact on overall economic output, but if new cracks appear in the U.S. supply chain (as 45,000 Eastern and Gulf port workers went on strike on Tuesday) (The outlook that emerged in But on Thursday, the union representing the workers, the International Longshoremen’s Association, agreed to call off the strike after receiving offers from port employers to improve wages.
Economists Samuel Toomes and Oliver Allen of Pantheon Macroeconomics said there is enough flexibility in the supply chain that a strike of just a few days would have a negligible impact on the U.S. economy. There were brief strikes by workers on the West Coast in 2002 and 2015, but they had no noticeable impact.
The Biden administration is closely monitoring the potential impact on supply chains from the port attack, and officials said they do not expect an immediate impact on supplies of energy, food or medicine.
Vice President Kamala Harris this week said she stands with longshore workers, saying they deserve a “fair share” of the profits made by foreign shipping companies.
Former President Donald J. Trump accused the Biden administration of failing to help both sides reach a deal and said the dispute reflected the pressures workers are under from inflation. He warned that extending the strike would only make things worse.
“This is a catastrophic event for our economy,” Trump said Tuesday in Wisconsin. “Inflation is also devastating because it increases the cost of everything.”
Jeanna Smialek and Danielle Kaye contributed reporting.
