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Red Sea Attacks: Potential Economic Impact for the US

By ITR Economics on January 25, 2024

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Following several attacks toward Israel in October, Houthi militants have been attacking ships in and near the Red Sea, off the coast of Yemen, since November, targeting both military and trade vessels. Some businesses and analysts are worried about the potential economic impact.

  • The Red Sea is a key part of a major trade route between Europe, the Middle East, and Asia. Ships avoiding the Red Sea must travel around the southern tip of Africa to get from Europe to Asia, a more expensive and time-consuming route.
  • The Houthi movement has control of a portion of Yemen, a country with shoreline on the southern end of the Red Sea.
  • The Houthis have attacked ships commissioned to carry cars, oil, chemicals, and other goods.
  • The attacked ships have carried the flags of various countries, including Liberia, Norway, Malta, Hong Kong, Singapore, and others.
  • As of this writing, the US and UK had launched air strikes against Houthi targets, and the Houthis were still targeting ships.

Economic Impact

The attacks are recent enough that, were there a significant economic impact upon the US, it would not yet be apparent in the data, which lags the present by a month or more. However, as the situation stands today, we can make some observations and inferences regarding the likely near-term impact on the US economy:

  • As the attacks are occurring along a Europe–Middle East–Asia trade route, they are more directly disruptive to US trade partners than to the US itself.
  • US businesses became well-schooled in dealing with supply chain issues soon after the COVID shutdowns were lifted. Many have turned toward onshoring and near-sourcing, likely lessening the impact – direct or otherwise – associated with the current Red Sea conflict.
  • There was a six-day full blockage of the Suez Canal (and therefore the Red Sea trade route) in March 2021, caused by a container ship that ran aground. This did not measurably exacerbate the trend in the New York Fed’s Global Supply Chain Pressure Index, which was then already rising due to general global supply chain issues in the wake of the COVID shutdowns. Furthermore, there was no measurable impact on US GDP or US Industrial Production (as seen on the chart, with March 2021 datapoint denoted).
  • While a major impact to the US macroeconomy is unlikely (given the situation as it stands today), certain businesses – especially those with international exposure – will likely face some pain.

US Industrial Production Index

We acknowledge and lament the human toll that accompanies geopolitical conflict. From a dispassionately economic perspective, however, we think that the Red Sea situation, while worthy of close monitoring, especially in the event of further escalation, is another case when waiting on the data before jumping to conclusions will be most prudent. Longer-term, this conflict and others will likely increase onshoring and near-sourcing initiatives.

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