Will the war in Iran turn President Donald Trump’s 1980s boom into the 1970s stagflation? Only if it continues, which the president says he wants to avoid. But the enemy also gets a vote, as the saying goes, so what if it becomes a protracted conflict?
As soon as Trump started bombing Iran, markets fell – especially growth stocks like AI. Silver collapsed. Bonds fell. Even gold is now down almost 3%, having replaced its initial war puppet with the ominous run to dollars seen in recessions.
Oil rose 10% in two days, from $67 to $74 per barrel, on its way to $86 at the time of writing.
Markets always react quickly – and they can overreact. The question for the broader economy is how long the war will disrupt oil exports from the Middle East.
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A thick plume of smoke rises from an oil storage facility that was hit by a US-Israeli attack late Saturday evening in Tehran, Iran, March 8, 2026. (Vahid Salemi/AP Photo)
About 20% of global oil exports pass through the narrow Strait of Hormuz, which lies next to Iran. Another 30% are within range of Iranian missiles in the Gulf of Oman and the Red Sea.
The US imports virtually none of this; Middle Eastern oil is only 2% of US oil consumption. But oil markets are global, so disruptions in the Middle East are driving up prices worldwide.
According to MarineTraffic, shipping traffic in the Strait of Hormuz fell by 70% during the first attack. On March 3, things came to a “total standstill,” according to Lloyd’s List.
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Trump then directed the U.S. International Development Finance Corporation to provide political risk insurance and financial guarantees for maritime trade through the Persian Gulf and the Strait of Hormuz.
This will help by removing the risk for shippers. But traffic is unlikely to fully recover until the campaign ends.
Trump is currently suggesting that the war could last as little as four weeks. But the government also says that the war will last ‘as long as necessary’.
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Promising a long war could be tactical, to demoralize the Iranian regime. But opinion polls show that the American people have little appetite for a long war.
A recent CBS poll found that a war that lasts less than eight weeks is at +52 in the polls, while a war that lasts longer is -8. The polls would likely get worse if the number of American casualties increases.
According to MarineTraffic, shipping traffic in the Strait of Hormuz fell by 70% during the first attack. On March 3, things came to a “total standstill,” according to Lloyd’s List.
On the economic level, there will only be real consequences if the war continues. And that falls into three baskets: growth, jobs and inflation.
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Historically, every $10 increase in oil prices leads to a decline of about two-tenths of a percent in economic growth. That is not much in an economy that is growing by more than 3%, according to the Fed’s GDPNow. It could reduce annual wage growth by about $300, as the $19 oil price has already risen.
But that’s on top of the expensive oil to heat your house or fuel your car. AAA says gasoline prices have already risen nearly 20%, from $2.98 to $3.56. Together with gasoline, transportation costs and utilities, that could increase inflation another six-tenths of a percent — which would translate into another $500 in household costs.
Meanwhile, both higher oil prices and slower growth are negatively impacting job creation. Given the movement we’ve already seen, they could reduce job creation by 15,000 to 20,000 per month.
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Flames rise after authorities say debris from an Iranian intercepted drone struck the Fujairah oil facility in the United Arab Emirates, Tuesday, March 3, 2026. (Altaf Qadri/AP Photo)
So it’s painful. But it’s not a recession.
What would bring us into a recession is a long war. A recent Deutsche Bank study looked at historical oil shocks and concluded that it would take a sustained oil jump of 50% to 100% to trigger a recession.
This would mean that oil prices remain high between $100 and $150.
Even then, according to Deutsche, oil only causes a recession if the economy is already faltering. The 1970s, for example, are the example of an oil crash. But the US economy was already stagnant because of Washington’s so-called “guns and butter” policy to fight Vietnam while building a trillion-dollar welfare state. This led to the ‘Nixon Shock’, which predated the oil embargo by several years.
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By contrast, when the bombs started, the Fed’s gross domestic product was a healthy 3% of GDP growth and its latest productivity was 4.9% – one of the highest since the Reagan boom.
This means that $100 oil could put us in the 1% growth zone. But this is unlikely to lead to a recession unless the Fed panics about oil inflation and raises rates. That could cut enough lanes to tip us over the edge.
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For now, the biggest impact of the war is on oil prices. But if the war continues, the oil will trickle down to growth, employment, consumer spending and inflation, which could trigger a Fed hike doom run.
If that happens, Trump could throw away his hard-won prime just in time for the midterm elections that will hand Congress to the Democrats. They will take us on a two-year journey of paralysis, congressional hearings and repeated impeachment proceedings.
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