OPINION:
In recent decades, the U.S. economy has become less prone to recession, but uncertainty about the ultimate outcome of the war with Iran may erase that advantage.
Through the 1970s, many more Americans worked in factories, and corporate planners had less information and fewer tools to forecast consumer demand.
The economy often followed a progression of excessive hiring and business investment, overproduction and layoffs, and consumers and businesses cutting back spending as inventories slowly cleared. Then the cycle repeated.
The economy was in recession about 15% to 20% of the time in the 1950s and 1960s. With the rise of the service economy, that statistic is now below 10%.
In today’s data-driven environment, it takes a traumatic shock to trigger a recession: a reckless government policy, such as financial regulators ignoring promiscuous mortgage lending before the 2008 global financial crisis, the shutdowns that accompanied COVID-19 in 2020, or a botched war.
Historically, wars boost growth by sweeping young people into the military and ramping up purchases in defense-related industries.
Yet the war with Iran could prove different because the economy has developed new vulnerabilities.
Unemployment at 4.3% is hardly recession-grade. It reached 9.9% and 14.8% in 2010 and 2020, respectively.
During the first Trump and Biden presidencies, the economy grew 2.5% annually and created 135,000 jobs a month.
Since President Trump’s return, those rates slowed to 2.1% and 26,000, owing to fewer new immigrants, confusion sowed by shifting tariffs and now uncertainties imposed by the war.
One hallmark of a recession is the employed continuing to live decently while the unemployed endure desperate job searches.
Twenty-five percent of the unemployed have been seeking work for at least six months, up from 19% in 2023.
The K-shaped recovery increasingly concentrates income and wealth among the top 20%, who now account for at least half and a growing share of consumer spending and among seniors, owing to their increasing numbers, rising home values and growing equity values in tax-deferred retirement accounts.
Both groups depend more heavily on capital gains for income. That makes the stock market more of a driver of consumer spending than just an indicator of economic vitality.
This year, profits should grow about 19% for the Magnificent 7 and 14% for the other 453 businesses in the S&P 500.
Normally, that’s a recipe for a stock market rally. However, anxiety about the war, fed by Mr. Trump’s shifting statements about how long the war would last, caused major stock market volatility.
The latter challenges the resilience of consumer spending. Business investment has become similarly concentrated.
Last year, U.S. nonresidential investment exceeded $4 trillion, but virtually all the growth was in information processing equipment, software and research and development.
The major players — Alphabet, Meta, Microsoft, Amazon and Oracle — are expected to spend $660 billion on artificial intelligence this year and $3 trillion by 2030.
Middle East investors have pledged an estimated $2 trillion to assist these efforts. Still, without a resolution to the war that permanently opens the Strait of Hormuz and ends Iranian threats to regional security, that financing and the vitality of the U.S. economy are in serious jeopardy.
When the war began, economists computed the impact of higher gasoline prices on consumer spending.
The average among 50 forecasters surveyed by The Wall Street Journal indicated that the price of West Texas Intermediate would have to rise to $138 a barrel and stay there for 14 weeks for the risk of a recession to each 50%.
Unfortunately, that math doesn’t consider how much Persian Gulf economies have diversified their critical contributions to global supply chains.
They provide one-fifth of the aluminum used in the U.S. economy and are major global suppliers of nitrogen fertilizer and precursors for plastics and other energy-intensive products.
Qatar supplies helium to Taiwan, whose foundries fabricate 90% of the state-of-the-art microprocessors, and South Korea, which produces about two-thirds of memory chips.
While U.S. and Israeli strikes largely targeted Iranian leadership and military-strategic assets, Iran has damaged its neighbors’ oil and gas facilities and the above-mentioned industries.
If the strait remains closed to free navigation for more than a few months or Iran is left free to strike industrial infrastructure without suffering consequences, then U.S. and global manufacturing will face acute shortages.
Those threaten a supply-side recession similar to two precipitated by crude oil shortages in the 1970s.
By failing to decisively end the Iranian threat and open the strait, Mr. Trump would exacerbate all these dangers to labor and equity markets, the outlook for AI investment, Persian Gulf industries and global supply chains.
As an exporter of oil, liquefied natural gas and helium, the U.S. may appear more insulated than Europe and Asia from the damage wrought by Iranian aggression, but it remains quite vulnerable, especially if Mr. Trump cannot bring the war to a successful conclusion.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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