U.S. Outlook: War Puts Growth in the Crosscurrents of Energy and Supply Shocks

The war in Iran has unleashed an oil-driven inflationary pulse that is percolating through the U.S. economy. It is resulting in purchasing power erosion and growth compression, forcing the Fed into an increasingly untenable tradeoff between inflation and the labor market.

The Conference Board (TCB) modeled impacts of the recent spike in oil prices and supply chain disruptions show lower GDP growth and higher inflation. Consequently, the Fed is likely to remain on hold until there is clarity about the geopolitical outlook.

Before the start of the war, consumers were already under pressure as 2025 tariffs continued to pass into retail prices and wage growth continued to normalize from the Covid-19-era spike. An additional tax in the form of higher prices at the pump will likely dent consumer spending elsewhere. The recent surge in policy uncertainty due to the war may prevent companies from raising headcounts. This would nudge the unemployment rate higher in the coming months, even as companies abstain from laying off workers. This in turn could further cap personal income growth and restrain economic performance in 2026.

Even if diplomacy prevails, the negative shock to the economy is already set in motion. Spillovers are likely to extend into the second half of the year—even if a peace agreement is reached in the coming weeks.