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Stocks might be soaring, but US economy is feeling Iran war shocks

The United States鈥� war with Iran is looking increasingly like a loss, economically speaking, no matter what happens next.

Iran has shown that it can bottle up as much as one-fifth of the world鈥檚 oil with its control over the Strait of Hormuz. The U.S. has so far proved itself unable or unwilling to open the waterway militarily.

The result is perhaps the worst oil squeeze the world has ever seen, which has now rippled across many nations鈥� economies, causing rationing and shutdowns. With its ample energy production, America has avoided the worst of that squeeze. Still, the conflict鈥檚 costs are such that analysts will likely chalk up the Iran war as a defeat 鈥� for American consumers, anyway.

鈥淭he only military outcome that鈥檚 feasible now is that Iran will effectively win,鈥� says Paul Collier, an economist at the University of Oxford and author of several books on the economics of war. 鈥淎ll Iran has to do is stick it out, survive. Iranian victory doesn鈥檛 mean that it defeats America in America, it just means that it defeats America in Iran.鈥�

Because of the war, American oil and gasoline prices have soared to levels not reached in four years, with a gallon of regular unleaded gas now averaging more than $4.50. One analyst at the Motley Fool, an investment service, calculated that it now costs more than $100 to fill up a Ford F-150 pickup, America鈥檚 most popular vehicle.

Rising energy costs are not just affecting consumers; they are especially hitting low-income earners. They are also digging into the businesses that serve them.

In earnings calls, U.S. corporations from McDonald鈥檚 to Whirlpool have warned about weakening consumer finances. Walmart says it鈥檚 seeing higher-income customers shopping its stores, suggesting rising concerns about the economy鈥檚 future. Low-income consumers are meanwhile 鈥渓iterally running out of money at the end of the month,鈥� Steve Cahillane, the chief executive of Kraft Heinz, told this week.

Research suggests that most war costs are incurred after the fighting ends, says Mr. Collier at the University of Oxford. And if there鈥檚 no clear-cut victor and uncertainty remains, both sides will escalate military spending.

In the case of oil-rich Gulf States, the specter of continued blockage of the Strait of Hormuz is likely to keep shipping above normal levels due to heightened security risks in the area. Marine insurers have raised rates by more than 60% in recent days.

Iran 鈥渉as shown it can close the waterway to traffic even in the face of significant military force,鈥� Gregory Brew, a senior analyst at research firm Eurasia Group, wrote in for Foreign Affairs. 鈥淭his threat will hang over the global economy for the foreseeable future.鈥�

Costs aren鈥檛 limited to the combatants. Other nations that have suffered fuel shortages resulting from the Strait鈥檚 closure are already seeking ways to diversify their energy sources. They are likely to develop these sources, including renewables, electrification, nuclear power, and alternative fossil fuel suppliers outside the region, even if they鈥檙e more expensive than the Gulf oil they replace.

President Donald Trump has argued that degrading Iran鈥檚 nuclear facilities to protect the U.S. from a nuclear encounter is worth the economic turmoil, including high oil prices. That goal, however, might not be achieved. According to , the U.S. military believes Tehran is from being able to create a nuclear bomb.

The price of war

The longer the conflict goes on, the greater the costs. For the U.S. and the administration, those include political costs. Six months before crucial midterm elections, when party control of the House and possibly the Senate is up for grabs, Mr. Trump鈥檚 popularity is fading.

His disapproval rating last week hit a record high of 59%, according to an NPR-PBS News-Marist. A poll published by The Economist on Thursday found the same level of disapproval. Much of that is linked to rising gas costs and the war itself. The University of Michigan鈥檚 Index of Consumer Sentiment also hit a record low this month, 48.2, in a preliminary reading on Friday.

鈥淎t this point, I believe that Trump understands that the midterms are lost,鈥� said Ian Bremmer, founder of Eurasia Group, on a Prof G podcast a week ago. 鈥淚 think he knows that he can鈥檛 turn the economy around.鈥�

But the economy could still rebound, despite higher oil prices. Powered by investment in artificial intelligence, the stock market is booming. Companies in the Standard & Poor鈥檚 500 index have been reporting an average rise of nearly 25% in first-quarter profits. Deutsche Bank has 鈥渙ne of the best earnings seasons in 20 years.鈥�

Also, soaring fuel costs haven鈥檛 put the brakes on hiring. On Friday, the U.S. Labor Department reported that the economy added 115,000 jobs last month, better than expected, and that unemployment remained steady at 4.3%. A healthy U.S. economy generally requires about 100,000 to 150,000 new jobs per month to keep the unemployment rate stable.

Ironically, a political loss for Mr. Trump this past week might help to buoy the economy.

A three-judge panel of the U.S. Court of International Trade ruled 2-1 that the president鈥檚 10% temporary tariffs on most imports were invalid. Mr. Trump had initiated the duties measure as a stopgap after the U.S. Supreme Court struck down his earlier, broader tariffs in February. These new duties, initiated just days after the first ones were rejected as illegal, were intended to be a temporary measure lasting 150 days.

Tariffs act as a tax on imported goods, hitting consumers and slowing growth. The administration has vowed to replace the now-illegal tariffs with other duties based on other presidential authorities. But the temporary respite gives importers a window to bring in lower-cost foreign goods.

The U.S is, in short, conducting two wars, the Iran conflict and the trade battles against other nations, and consumers are bearing the brunt of the damage.

鈥淣one of this has been positive for the economy,鈥� says Brett House, an economics professor at Columbia Business School. 鈥淚t鈥檚 certainly increasing price pressures and dampening growth鈥�. Where it leaves us is really contingent on how long the conflict goes on and how it鈥檚 concluded.鈥�