- by New Deal democrat
Even before the Iran war started almost three weeks ago, the US economy was in something of a stagflationary scenario. Let’s take a look at how the war, and in particular the closure of the Strait of Hormuz, has impacted that, starting with the direct effects and then following the ripples out to the wider economy.
Most directly of course, the price of a barrel of oil has shot up from about $63 to about $95:
This is the highest price since August of 2022.
Unsurprisingly, this almost immediately caused a similar spike in gas prices. Normally I make use of the weekly information from the E.I.A., which shows the national average for a gallon of gas as of Monday at $3.72. But events have been moving so fast that the daily average from GasBuddy is more accurate, which as of the time I am typing this is $3.86/gallon:
This is also a three year high.
Although I won’t bother with a graph, keep in mind that as a share of disposable income this remains very low historically. This is not the equivalent of the 1974, 1979, 2008, or even 2022 oil price spikes.
The inflationary impact of these prices has shown up in both US Treasury rates and mortgage rates:
A closer look at daily mortgage rates shows they rose from 5.99% to 6.28% as of Monday:
This will likely put a damper on the “green shoots” slight rebound in the housing market I have been talking about for the past few months.
And according to Truflation, which attempts to measure consumer prices daily, using prices on the internet and other sources, YoY consumer prices have jumped from a low of about 0.68% in early February to 1.52% as of yesterday:
The broad economy has been kept afloat by AI data center-related spending, which shows up in three high frequency weekly data series. The first is consumer retail spending published by Redbook:
On a YoY basis, not only has consumer spending been holding up throughout the past year, but the comparisons have been increasing YoY. In fact, the last time the YoY% increase came in at under 5% was last July. As of this week’s report, it was up 6.4% YoY.
Secondly, new jobless claims have also been hovering near their 50 year lows:
Although they have trended slightly higher since the beginning of this year, that has been their pattern, even after seasonal adjustments, for the last three years. They remain lower YoY, which is an absolutely positive sign.
But the third metric, stock market gains, have been faltering:
The above graph is normed to 100 as of Election Day 2024. Both big selloffs since then have been due to actions by one man, first the tariff-related 20% selloff last spring, and now a modest 3% selloff (so far) from the Iran war.
The S&P 500 did make a new 3 month low last week, which takes it into neutral territory by my method. Note that it is also only higher by less than 2% from 6 months ago as well.
Finally, this morning we got updates from the Before Times (i.e., January and February) on two significant data points that are affected by tariffs and one of which is also impacted by oil prices.
The producer price index came in “hot” for February, with final wholesale demand prices increasing 0.7% for the month, and 3.4% YoY. Raw commodity prices rose 2.1% for the month, and 3.2% YoY. The increasing trend is apparent in commodities, and to a lesser extent - at least for the past 8 months - in final demand. The below graph also shows the CPI (red), which historically followed, but since the advent of “just in time” inventory methods has largely been coincident or only slightly lagging PPI:
Again, this does not take into account the big increase in oil and gas prices so far this month. It suggests at very least that we should not expect any disinflation in consumer prices with the likely exception of shelter.
Secondly, the final version of durable and capital goods orders for January showed the former unchanged and the latter up a small 0.1%. Their positive trajectory since mid-2024 remains intact, with the former up 10.3% YoY and the latter up 4.4% - but, again, remember this is through January:
To sum up the state of the economy based on the above, before the Iran war the main part of the economy was either on the cusp of, or actually in a mild recession with the tipping point being the government shutdown last autumn. This was counterbalanced by the AI building Boom, which spilled over into stock prices and wealth-effect related consumer spending by the affluent.
The war, and in particular, the resulting oil prices shock is unlikely to have any big effect on AI data center construction, certainly not directly. Hence (most likely) the mild reaction by the stock market so far. But the inflation is very much showing up at the gas pump, and considering producer prices already jumped in February, CPI for March and April are likely to point to intensifying stagflation as well. A renewed slump in housing would certainly not help. Which means that the lower part of the “K” shaped economy may finally outweigh the upper part.
