Financial markets are too pessimistic about how the Iran war will affect the U.S. economy. Yes, oil prices have surged, volatility has returned to global equity and commodity markets, and many commentators are warning about either a recession or a long period of stagflation. But these fears are misplaced.
The U.S. economy of today should weather the storm of the Iran war. The United States is a net exporter of oil and natural gas. Domestic oil and gas companies are generating many billions of dollars in profits from the sharp rise in oil and gas prices. Excess profits from the war could be as high as $63 billion. Those profits will be recycled back into the economy. More drilling for oil and gas will take place. Additional jobs will be created. A portion of the additional profits will be returned to shareholders, who will then invest in new profitable ventures. Capital spending will increase. The oil and gas sectors will emerge from the Iran war with strengthened balance sheets and higher production levels. U.S. energy producers will gain share in global oil and natural gas markets, including the market for liquefied natural gas.
Yes, energy prices, especially gasoline prices, have surged, and this will have a negative effect on household consumption, which is the driving force of the U.S. economy. But as a percentage of disposable personal income, America’s families spend dramatically less on gasoline than they did just 20 years ago. In 2007, as a percentage of GDP, households spent 5.7% on energy, including gasoline. Today, that percentage is just 3.7%, and perhaps slightly lower. Even a 30%-40% increase in gasoline prices will not cause a recession.
Before the war started, the U.S. economy was relatively strong. Economists were forecasting economic growth of around 2.5%-3% for 2026. Solid personal income growth was underpinning the economy. Even with the spike in gasoline prices, income growth exceeded inflation.
In large part, the strength of the economy is a function of the sustained productivity boost from the artificial intelligence revolution. In addition, capital spending by businesses is strong, helped in significant part by the extraordinary capital investment, perhaps as high as $700 billion, by America’s largest companies in the data centers necessary for the AI revolution.
Naysayers on the economy are ignoring the forecast by oil futures markets that the current oil price shock will not last long. The price of oil for delivery in December 2025 is under $80 a barrel. That is only about 10% higher than prewar oil prices.
A useful frame of reference for the current oil shock is the Russian invasion of Ukraine in 2022. Oil prices skyrocketed by $45 a barrel. By contrast, on Monday, oil prices were up by about $30 a barrel from pre–Iran war prices. A Federal Reserve research report found that the 2022 oil spike reduced U.S. GDP by only 0.13%. Equally important, the Ukraine war oil price surge raised domestic inflation by only around 0.5%. When oil prices fell, inflation resumed declining.
CUBA OPENS PRIVATE-SECTOR INVESTMENT TO NATIONALS IN US
Financial markets are also too pessimistic about the inflation outlook and the path of future policy by the Federal Reserve. It is true that inflation has increased recently to an annual rate of around 3%. But Jason Furman, who was an economics adviser to former President Barack Obama, says the recent increase in inflation is probably temporary and that the inflation trend remains lower. With sustained improvement in productivity, low-cost pressures being experienced by businesses, contained inflation expectations, and noninflationary wage increases, it is reasonable to assume that the Federal Reserve will resume cutting interest rates sometime in the second half of the year.
The overall outlook for the U.S. economy remains strong. The U.S. will emerge from the Iran war with a strengthened position economically. Americans should be optimistic about the future of the economy.
James Rogan is a former U.S. foreign service officer who later worked in law and finance for 30 years. He now writes a daily note on financial markets, economics, politics, and social issues.
