Economists surveyed by The Wall Street Journal initially feared the Iran war would severely impact the U.S. economy, but recent indicators suggest resilience. Despite these fears, the conflict has resulted in stubbornly high inflation and elevated oil prices. The probability of a recession in the next 12 months rose to 33% from 27% in January, with some forecasts indicating that West Texas Intermediate crude prices staying at or above $125 per barrel for a year, or above $100 per barrel for eight to 10 weeks, could push this likelihood over 50%.
The conflict has led economists to downshift their outlook for the rest of the year, pointing to higher inflation, slower near-term growth, and weaker job creation. They raised their consensus for year-end core inflation, based on the price index of personal-consumption expenditures, to 2.9% from 2.6% in January, missing the Federal Reserve's 2% PCE inflation target. Although they expect reasonable economic growth in the near term, they don't anticipate it lasting, cutting forecasts for the second and third quarters compared to January's survey. For the entire year, growth is projected at 2% on a fourth-quarter year-over-year basis, down from 2.2% previously.
The labor market is also expected to be affected, with economists forecasting only 38,000 jobs added per month on average over the second and third quarters. A key challenge identified is persistently high oil prices, which threaten to remain elevated even after the war concludes. While some expect the oil-price shock to be short-lived, with 59% anticipating no or minor pass-through into core inflation, 97% elevated their inflation forecasts due to surging energy prices. Headline CPI rose 0.9% last month, or 3.3% annually, with a 21.2% jump in gasoline prices accounting for nearly 75% of the increase.
