The Iran war didn't break the US economy, but what happens next?

[XAU/USD](https://www.fxstreet.com/rates-charts/xauusd) [EUR/USD](https://www.fxstreet.com/currencies/eurusd) [Trade War](https://www.fxstreet.com/macroeconomics/events/trade-war) [GBP/USD](https://www.fxstreet.com/currencies/gbpusd) [Silver](https://www.fxstreet.com/rates-charts/xagusd) [WhatsApp](https://whatsapp.com/channel/0029VaDGsU90lwgjJ5Sh8Y45)[Telegram](https://t.me/forexnews)[LinkedIn](https://www.linkedin.com/company/fxstreet)[X (Twitter)](https://x.com/FXStreetNews)[Facebook](http://www.facebook.com/FXstreet)[Instagram](https://www.instagram.com/fx_street)[YouTube](https://www.youtube.com/user/fxstreetcom/)[TikTok](https://www.tiktok.com/@fxstreet.com) [Newsletter](https://www.fxstreet.com/subscriptions) [FXStreet](https://www.fxstreet.com/ "FXStreet")[Visit Pepperstone - Sponsor (opens in new window)](http://pubads.g.doubleclick.net/gampad/clk?id=6731001804&iu=/7138/FXS30) [Upgrade](https://www.fxstreet.com/info/premium?utm_source=paywall&utm_medium=internal&utm_campaign=paywall-no-premium&utm_content=noAMP) [Login](https://www.fxstreet.com/account/login?uriToRedirect=https%3A%2F%2Fwww.fxstreet.com%2Fanalysis%2Fthe-iran-war-didnt-break-the-us-economy-but-what-happens-next-202606191356&step=login-options) Nearly four months after the start of the Iran war, the US economy remains remarkably resilient. While the conflict initially triggered a severe disruption to global energy markets and a sharp rise in Oil prices, **recent diplomatic progress between Washington and Tehran has eased concerns about a prolonged supply shock**. Even before the signing of a preliminary peace agreement, most economic indicators suggested that the US economy was weathering the conflict **far better** than many economists had feared. The conflict has reignited inflationary pressures and fueled widespread concerns about a potential economic slowdown. Yet, most of the key indicators released since the conflict began suggest that **economic activity remains solid**. While inflation has clearly accelerated and consumer confidence has deteriorated, the **labor market remains relatively stable**, business activity continues to expand and household spending has so far resisted the loss of purchasing power caused by higher energy costs. The contrast between gloomy sentiment surveys and **resilient hard economic data** has become one of the defining features of the US economy in recent months. ## **The Oil shock has not derailed economic activity** Historically, **major Oil price shocks have often preceded periods of economic weakness** in the United States (US). For several months, the Iran war appeared to be following that script, with Oil prices surging as the closure of the Strait of Hormuz disrupted nearly a fifth of global energy supplies. However, recent developments have significantly **improved the outlook**. The United States and Iran have signed a memorandum of understanding aimed at ending the conflict, while shipping traffic has gradually resumed through the Strait of Hormuz after Washington lifted its naval blockade. As a result, West Texas Intermediate (WTI) Crude has fallen sharply from its war highs and is now trading near $76 per barrel, reducing the inflationary pressure that had built up during the conflict.  WTI US Oil daily chart. Source FXStreet. The easing in energy prices has reinforced the view that the **US economy may avoid the worst-case scenarios** that many economists feared earlier this year. Despite this, **activity indicators remain firmly in expansion** territory. The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) rose to 54 in May, while the ISM Services PMI climbed to 54.5. Both readings point to **continued growth across the economy** and stand in stark contrast with recession fears that intensified following the outbreak of the conflict. Jonathan Golub, Chief Equity Strategist at Seaport Research Partners, recently said to CNBC that business demand remains in **"clear expansion mode,"** noting that consumers have yet to show significant weakness despite higher gasoline prices. Part of this resilience may stem from **structural changes** within the US economy. As Eswar Prasad, Senior Professor of Trade Policy and Economics at Cornell University, recently told Fortune: "The US is not the manufacturing powerhouse it once used to be." Prasad argues that the **growing importance of the services sector** has helped cushion the economy from the impact of higher energy prices, while America's position as a net Crude exporter provides an additional buffer against the current Oil shock. ## **The US labor market remains remarkably stable** Perhaps the strongest argument in favor of economic resilience comes from **the labor market**. While economists continue to warn that higher energy prices could eventually weigh on hiring, the latest employment data show little evidence of a significant deterioration. Nonfarm Payrolls (NFP) increased by 172K in May, beating expectations and posting a **third consecutive month of strong gains**. The Unemployment Rate is stable at 4.3%, still below the 4.4% level recorded before the outbreak of the war. Beyond payrolls, the Job Openings and Labor Turnover Survey (JOLTS) showed that Job Openings increased to 7.618M in April, the highest level since May 2024 and well above expectations. The data suggest that labor demand remains healthy despite heightened uncertainty. **Signs of cooling are nevertheless emerging**. Weekly Initial [Jobless Claims](https://www.fxstreet.com/economic-calendar) have been trending higher since late April and reached 226K during the week ending June 12. Even more notably, the 4-week average reached its highest level since the start of the war at 223.25K.  US Initial Jobless Claims. Source FXStreet However, Continuing Jobless Claims remained relatively steady, printing at 1.81 million during the week ending June 5, slightly below the 1.847 million recorded during the final week of February, immediately before the conflict began. The labor market's resilience reflects several structural factors, as the Federal Reserve’s (Fed) Beige Book has described the current environment as a **"low-hire, low-fire" labor market**, where companies have become more cautious about hiring but remain reluctant to lay off workers amid persistent labor shortages. At the same time, business activity remains in expansion territory while manufacturing hiring has been supported by **defense-related demand and growing investment in data centers**, helping offset weakness in other sectors. ## **Inflation is emerging as the main economic headache** If the broader economy has so far absorbed the shock remarkably well, inflation is proving to be the **clearest and most immediate** consequence of the Iran war. The Consumer Price Index (CPI) accelerated to 4.2% YoY in May, up sharply from 2.4% in February and its highest level since May 2023. The Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation gauge, climbed to 3.8% in April, while core PCE reached 3.3%, its highest level since November 2023. Importantly, **inflationary pressures are no longer confined to energy prices alone**. Core CPI, which excludes Food and Energy, increased to 2.9% in May from 2.5% before the conflict began, suggesting that higher Oil prices are gradually feeding through to other parts of the economy.  US Consumer Price Index. Source FXStreet **Rising inflation expectations may prove even more concerning.** The University