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Welcome, compatriots, to the latest issue of Receipts.
Sam Stein called me this morning to discuss a pretty doomerist tweet he’d come across analyzing the war’s effects on the global economy. He wanted to know: Was it reasonable? More specifically, what would the worst-case scenario look like, economically speaking? And how would it happen? After talking it through for about twenty minutes, we agreed that it would make great fodder for this evening’s newsletter. Because who doesn’t wanna feel an acute sense of dread right around dinnertime? So today I’m going to walk you through the ways a global oil shock (and other supply-chain disruptions) might weigh on the economy, and how other risk factors might affect things, too.
If there are other big economic risks you think I’ve left out, please drop me a note in the comments. And if there are upside risks to the outlook, please tell me that, too. We could all use a lil’ sunshine these days.
Thanks for reading—and if you’re not already a Bulwark+ member, I hope you’ll consider joining. You’ll not only be supporting our ability to publish comprehensive explainers like this one, but you’ll get to be part of our growing community. Sign up today at 20 percent off the normal annual price:
–Catherine
The Worst-Case Economic Outcome of Trump’s Iran War
Oil shocks don’t only raise prices. They also destroy growth and jobs.
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THE IRAN WAR HAS BROUGHT the dreaded r-word—recession—back into play amid a deeply fractured global energy market. To be clear, a massive downturn is not inevitable, nor can we even say it’s more likely than not. Recent surveys of economic forecasters place recession odds over the next year at about a third.
But those surveys were at least partly fielded before recent escalations in the war. And historically, oil shocks have preceded recessions in the United States (and elsewhere). So it’s worth walking through why this war and its resulting supply-chain disruptions have significantly raised the odds of recession—and what that outcome would actually look like. Buckle up. . .
The war isn’t just raising prices—it’s also slowing growth
Even before the war, the U.S. economy was showing serious signs of fragility.
Inflation has been above the Federal Reserve’s target of 2 percent for five years now, and Donald Trump’s trade wars have contributed to rapid price growth. For example, wholesale prices rose sharply in February (i.e., before the war began). Meanwhile, job growth has also sputtered; Fed Chair Jerome Powell said in a press conference Wednesday that if you adjust for what Fed staff thinks may be “overstatement” owing to methodological challenges, there has been effectively “zero net job creation in the private sector” over the past six months. And uncertainty (related to trade wars, regulatory changes, various rule-of-law-type risks) has also been a drag on economic growth.
That was the grim baseline prior to the war. Now layer on to those conditions a global oil shock.
Oil prices have been extremely volatile since the war started. Brent crude briefly surged above $119 per barrel on Thursday morning, then fell back and settled around $108. Fuels made from crude have become painfully expensive, with diesel prices nationwide now above $5 per gallon, and gasoline prices inching toward $4 per gallon. In much of the western United States, they’re already well above that milestone.
Jet fuel prices have likewise nearly doubled in the past month, leading to higher airline fares and canceled flights.
And needless to say, this is not only a U.S. story. Petroleum product prices have shot up even higher in Europe and Asia, leading to fuel hoarding and social unrest. The same holds true for liquefied natural gas prices, although the United States is relatively insulated from that hike because we produce so much LNG ourselves.
Obviously, high fuel prices are frustrating for consumers, who see billboard advertisements on their drive to work every day reminding them how expensive gas keeps getting. But fuel prices don’t just feed into inflation; they also have enormous consequences for global economic growth.
That’s because demand for fuel is pretty “inelastic,” meaning it’s hard for consumers or companies to cut back how much they buy when prices rise. People have to buy gas to commute to work or take their kids to school. Companies have to buy fuel to run their factories or keep the lights on. This means that when fuel prices rise, the buyers of fuel must grit their teeth, spend the money, and then cut back spending on other things.
Think about it this way: American consumers are collectively spending an extra $300 million per day on gasoline than they did about a month ago. That $300 million is now unavailable to purchase other goods and services in the economy, because so much disposable income has been gobbled up by gasoline.¹
We’re not there yet! So if you’re inclined to spend your disposable income on a product worth the price tag, let me suggest a Bulwark+ membership:
In an economy driven by consumer spending,² this can get very painful very quickly. When businesses lose customers, they cut back on their own investment and staffing. Their laid-off workers in turn cut back on their own spending, which contributes to further layoffs. And companies are dealing with their own higher input prices, thanks to the war. Which makes hanging on to staff even harder.
This is exactly the kind of vicious cycle that causes recessions.