The war has not materially altered underlying macroeconomic fundamentals, and that is likely to remain true regardless of whether the ceasefire holds.
Whether the ceasefire in Iran holds is a question for political analysts. From our apolitical, data-dependent standpoint as economists, our initial analysis saw the war unfolding as a short-term, primarily financial shock with some inflationary ripple effects.
The war has not materially altered underlying macroeconomic fundamentals, and that is likely to remain true regardless of whether the ceasefire holds. Five weeks of wartime data support this view.
Financial Volatility; Macroeconomic Resiliency
The table below shows that the primary impact of the war has been concentrated on energy markets tied to passage through the Strait of Hormuz, particularly oil prices.
The impact on the bond and equities markets has been primarily of the unnerving volatility variety fueled by economic policy uncertainty. Furthermore, metrics of actual economic activity — including the Dallas Fed’s proxy for real GDP, Johnson Redbook retail sales, and even actual oil field production — show the impact has been minimal. This reinforces that the status of the ceasefire is far from the most important variable driving US economic activity.
What We Are Watching
We are focused on three metrics:
- Consumer income
- Inflation
- Other labor market trends
Our focus remains on how well the labor market and income trends hold up relative to inflationary pressures. Thus far, the consumer is showing resiliency. Even with a ceasefire — if it holds — it will take time for supply chains to renormalize for items like semiconductor inputs, helium, jet fuel, and fertilizer. Expect consumers to continue to spend given a full employment economy. While white-collar layoffs make headlines, they are impacting the margins of the labor market more than the heart of it, as white-collar employment makes up about one-fifth of total US employment.
Bottom Line
Businesses will need to be laser focused on three key metrics:
- Price sensitivity
- Volume
- Margins
Customers may become increasingly sensitive to price increases after years of elevated inflation. As inflation heats up, volume growth will be harder to sustain in some segments. Keep a close eye on your volume.
Margins will face increasing pressures as labor costs, electricity costs, and other costs rise irrespective of the status of the war. The risk of Profitless Prosperity is rising. It’s not too late to act, but a sense of urgency is imperative as we edge closer to the weak economic times of the 2030s.