- With so much ambiguity about the scope of this continued conflict, it is not possible to make clear economic forecasts of its outcome. Yet uncertainty is the bane of capitalism. And it does not take a functioning Iranian military to devastate the global economic system.
- Traffic through the Strait of Hormuz is unlikely to resume while the conflict is ongoing. Absent on-the-ground intervention, little can be done to prevent Iranian forces from harassing oil-carrying vessels passing through the Strait of Hormuz.
- While President Trump can control when we stop bombing Iran, the U.S. has no control over when Iran may choose to stop retaliating against us. These lingering worries over future Iranian terrorism in the Strait of Hormuz and worldwide will likely contribute to oil prices stabilizing at a higher level.
- The price of oil has increased 50% since February. Unless actual regime change happens in Iran, the hope that the war will somehow bring oil prices down below the range of the past decade is highly implausible.
- Combined with other concerning trends in an already weakened economy, there is good reason to be concerned that the war will be a catalyst that pushes the U.S. economy into a recession.
The Trump administration has offered a number of explanations for why the United States joined Israel in attacking Iran on Feb. 28, 2026. A common refrain that we have heard from the administration is that Iran attacked us in 1979 when the Islamic Republic took over the American Embassy in Tehran, and after 47 years, it is about time we responded with force.
Yet why have previous Republican and Democratic administrations been so reticent to engage militarily with Iran, despite its regime being the most dangerous in the Middle East? Perhaps because no one can predict how such a war would turn out.
Economic disruptions likely not temporary
Obviously, the United States has the ability to pulverize Iran’s economic and military installations. Yet, as we saw in Vietnam, Afghanistan and Iraq, that is not enough to guarantee a long-term victory.
When it comes to the economy, it does not take state-of-the-art aircraft or a fleet of warships to devastate the global system. Twenty-five percent of world oil production occurs in and around the Persian Gulf. A look at a map shows there is only one way in or out of the Persian Gulf, and that is through the Strait of Hormuz. At its narrowest width, the strait extends 21 miles between the Musandam Governorate, an exclave of Oman, to the south and Iran to the north.
Little can be done to prevent Iranian forces from harassing oil-carrying vessels passing through Hormuz without taking physical custody of its northern coast, which would mean putting boots on the ground and the American casualties that would accompany such a move.
At present, traffic through the strait has effectively stopped, and it is unlikely to resume while the conflict is ongoing.
The price of oil has increased 50% since February. This is happening at a time when the economy is already in a weak state. Annual growth in real gross domestic product (GDP) has decreased from 3% in 2024 to 2% in 2025. Unemployment remains in the neighborhood of 4%, where it has been for the past decade, except during the pandemic.
Inflation has also remained stubbornly above the Federal Reserve’s target of 2% per year, averaging 2.5% since Trump’s return to office. Overall, the economy in Trump’s second term has been mediocre — not as bad as many economists feared, but not great either.
The one bright spot in the economy had been the stock market. Historical S&P 500 price data show that stocks rose about 13% in the first year of Trump’s second term, which similar to the average annual returns during the Obama and Biden administrations.
However, the losses suffered by stocks since the war began have put an end to that. As of the market’s closing on March 10, the S&P 500 has fallen 3% from its high on Jan. 27, and the average annual return since the inauguration is now only 10.8%.
Given all this, there is good reason to be concerned that the war will be a catalyst that pushes the U.S. economy into a recession.
Future Iranian retaliation isn’t in our control
Unless actual regime change happens in Iran — which would require an enormous investment of blood and treasure — the hope that the war will somehow bring oil prices down below the range of the past decade is highly implausible.
If the United States ceases operations in Iran this or next week, as Trump has hinted, oil prices will most likely stabilize at a level higher than the previous status quo because of lingering worries over a new wave of Iranian terrorism both in the Strait of Hormuz and worldwide.
“Any time I want it to end, it will end,” the president said on Wednesday in an interview with Axios. But while Trump can control when we stop bombing Iran, he has no control over when Iran may choose to stop retaliating against us.
Government savings spent on war?
In any of these scenarios for what comes next, the expense of the war is likely to undo progress the Trump administration had made in cutting government spending.
Expenditures on public goods and services (what macroeconomists usually refer to as “big G,” a component of GDP and the true opportunity cost of the government) decreased in real terms by 1% in 2025, although that only amounted to $40 billion.
As a result of the war, the military is now consuming an extra $1 billion a day. So if we continue the fight for more than a month, those savings will be gone.
With so much ambiguity about the scope and objectives of this continued conflict, it is not possible to make disciplined economic forecasts of its outcome. Nevertheless, the risks engendered by a contest with perhaps the most zealous of foreign governments are huge.
Uncertainty is the bane of capitalism, so people are fully justified in questioning how this conflict will impact their livelihoods.