Will the Iran War Deliver a Long-Predicted U.S. Recession?

The post-Covid economy is a study in resilience, shrugging off a series of shocks and crises from surging inflation to the Ukrainian war to U.S. tariffs. It is also a study in false alarms as pundits and analysts have relentlessly predicted an “inevitable recession.” They talked down the Biden economy in 2024 and did the same after President Trump’s tariffs last year, to no avail. Now executives rightly ask if the U.S.-Israel war with Iran, which has engulfed the region, will finally deliver a U.S. recession. Though the war’s impact is all too clear in headlines and energy prices, its impact on the economy is anything but. War always forces analysts to make unreliable macroeconomic forecasts on top of unknowable geopolitical gyrations. The best that leaders can do in this situation is to think through the geopolitical drivers as well as the channels by which the energy crisis is transmitted to the (real) economy. While this conflict could amount to a confluence of headwinds that put the U.S. economy in recession, that’s far from a foregone conclusion. The Trap of History In times of geopolitical turmoil, pundits and analysts often turn to history for precedents and templates. The past is full of energy shocks, but it is also easy to misread. Take the recession of 1990. A surging oil price that followed the start of the Gulf War was the last straw for a U.S. economy already vulnerable and enfeebled by the savings and loan crisis of the late 1980s. The sensitivity to oil prices was far higher then, as the economy used twice as much energy per unit of output than today. After Operation Desert Storm, oil prices returned to modest levels, removing that headwind to recovery. Context matters. It’s also tempting—but treacherous—to draw lessons from the 1970s oil shocks. Spiking energy prices did enormous damage because inflation expectations were unanchored, which meant that high energy prices passed through to interest rates unimpeded. This severely curtailed the ability of monetary or fiscal policy to respond to economic weakness. Today, inflation expectations are firmly anchored. History is idiosyncratic, not formulaic. What matters today? Duration Matters More than Prices Though the price of oil reliably grabs headlines, it is the duration of price moves, not the level, that matters more. Oil at $300 for a few days would be far preferable to oil at $150 for several months. For the macroeconomy, the duration of the closure of the Strait of Hormuz will remain more important than the question of Iran’s political stability. Nearly three weeks into the war and after escalating attacks on upstream oil facilities on both sides, a short duration—measured in days—is becoming less plausible. The difficulty is that nobody—including the White House—knows the war’s duration. Though Washington can decide to escalate or seek off-ramps, Iran’s leadership is part of the equation. As former Secretary of Defense Jim Mattis put it years ago: “You may want a war over. You may declare it over. You may even try to walk away from it. But the bottom line is the enemy gets a vote.” The impact on energy prices therefore remains deeply uncertain as Iran’s regime clings on, and its strategic calculation may sharply differ from the Trump administration’s. Though far from infallible, financial markets may offer the best take on likely duration. They continuously incorporate new information and generate actual prices at which firms can hedge future exposures. While the price of oil in the near term has moved a sharp 43% ($67.02 to $96.14 as of March 19), the price move of oil at the end of 2026 was a more manageable 23% ($63.73 to $78.41). Put another way: Today, traders collectively view the war’s duration as contained and the shock as mostly an interruption of a lower oil price regime, rather than a break into a high oil price regime. How Impact Transmits to the (Real) Economy Even though the length and level of the energy price shock is unknowable, we can begin to sketch the channels by which such headwinds slow the economy and risk putting it into recession. The first distinction is between supply and price disruption. The supply disruption does not hit all economies equally; the closure of the Strait of Hormuz mostly hits Asian economies and Europe to some extent. Oil prices, however, are global and thus spread to all corners of the world economy instantaneously. There are five transmission channels from energy prices to macro impact to consider in the U.S. economy: 1. Inflation and real wages Higher energy prices drive inflation and constitute a real wage cut (lower purchasing power) for consumers who cannot avoid the gas pump. Real wage growth was expected around 0.7% in 2026 and at this point in the cycle is the critical engine of U.S. consumption growth. (Hiring, the other engine, has ground to a halt.) A short energy price spike could shave off perhaps just 0.1%, but a sustained one could eliminate all real wage growth this year. That said, households could buffer consumption around energy shocks by saving less. 2. Wealth effect Lower stock prices amount to a balance sheet shock that is a headwind to consumption, though we continue to stress resilience here. The equity market drawdown so far (-5%) is some way from a correction (defined as a drawdown of -10% or more) and not even a bear market (-20%) guarantees a recession. This cycle alone has seen two non-recessionary bear markets already (2022 and 2025). And even with a 20% drawdown, U.S. balance sheets would remain quite strong. 3. Investment Volatility and uncertainty weigh on firms’ confidence and investment as projects are paused, postponed, or shelved. Sustained higher oil prices might spur some energy sector investment but would not outweigh the losses from projects that are paused, postponed, or cancelled across the rest of the economy. That said, the surge in AI data centers that has provided a tailwind to growth is unlikely to be unmoored by oil prices, even as it has its own risk. Directionally, business investment will add another headwind to growth, but we’d expect it to be small if the conflict doesn’t draw out. 4. Financial conditions Volatility in financial markets can increase the flow and cost of credit as well as temper capital market activity. Most U.S. firms’ activities are not particularly sensitive to oil prices, but market volatility, lower valuations, high credit spreads, or tighter credit conditions all create friction for firms looking to hire or invest. Here too the direction of impact is negative, but we expect it to have a small macroeconomic footprint unless the conflict escalates further. 5. Monetary policy Even if central bankers are inclined to focus on core inflation instead of energy-driven inflation, their appetite to proactively cut rates to shore up the economy is likely dimmed by a new round of muddled inflation statistics above their policy target and moving higher. This is confirmed by markets pricing fewer rates cuts in the policy path since the start of the war. Another relative headwind, if modest in impact. What Executives Should Do As senior leaders navigate this latest shock, we recommend: Don’t conflate geopolitical and macroeconomic crises. Though the former can lead to the latter, there are many examples of geopolitical crises that did not leave a macroeconomic mark. Analyze, don’t predict. The best executives can do in this situation is to analyze the drivers of the shock and the transmission channels to the economy and re-assess as the facts evolve. Use history prudently. Don’t be blinded by analogy. Typically, the differences are more insightful than the similarities. Reject “history is destiny”; each installment of history is unique. Think at the system level. Economic risk is not about the shock per se, resilience is about the state of the system at the time of impact and as well as the myriad reactions by its stakeholders. Don’t doomscroll. The microphone is typically handed to those willing to spin the darkest macroeconomic tale. Understanding the downside risk is essential, but tail risks should be given extra scrutiny by asking why all the breakers would fail. Sequence vs. Confluence of Shocks In the past few years, pundits have often extrapolated from shocks and crises, often pointing at historical precedent to confidently proclaim calamity. But in each case—inflation, rates, war, tariffs—the extrapolations misjudged the economy’s resilience. Each presented cyclical risks and uncertainties, but none was powerful enough to overwhelm the expansion. Now in its sixth year, the post-Covid expansion is certainly battle-proven and perhaps battle-tired, needing time to recover from each of the setbacks. The biggest risk isn’t a single shock but a confluence of shocks that collectively overcome the economy’s resilience. But nobody knows where a sequence of shocks ends and a confluence begins. The economy had digested the inflation shock and high interest rates when tariffs battered it again—yet still no recession. Now, just shy of the one-year anniversary of Trump’s “liberation day,” when the economy looked to be moving toward more solid ground, the next shock has landed. As the dividing line between a sequence of digestible shocks and an indigestible confluence of shocks blurs, the risk to the economy is clear. As per the transmission channels above, a longer duration to elevated prices could rob the economy of the baseline strength it needs to cling on.

Will the Iran War Deliver a Long-Predicted U.S. Recession?

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