The United States faces economic turmoil as recession fears ease

The United States economy is suddenly facing new crises that could be devastating, with tensions flaring in the Middle East and many countries struggling with the repercussions of a devastating hurricane.

These events occurred as US policymakers gained confidence that they had tamed inflation without pushing the economy into recession, and as opinion polls and consumer surveys indicated that Americans’ sour economic mood was beginning to improve. But in just one week, new risks have emerged.

The economy now faces the prospect of higher oil prices and the fallout from a storm that could do more than $100 billion in damage to wide swaths of the Southeast. Economists are also tracking the potential consequences of a port workers’ strike, which was suspended Thursday evening.

“There is new uncertainty,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics. “If we lose oil production in the Middle East, and if the ports don’t work, both are inflationary.”

This uncertainty comes just weeks before a presidential election in which the economy – especially inflation – is one of the biggest factors on voters’ minds, and less than a month after the Federal Reserve began cutting interest rates in more than two decades. High. The central bank gained confidence that inflation was returning to its 2 percent target, but was cautious about labor market weakness.

Even before the new risks emerged, the International Monetary Fund was predicting a slowdown in the US economy next year.

The escalation of conflict in the Middle East is the most worrying scenario for the global economy. Economists have warned for nearly a year that if the fighting between Israel and Hamas in Gaza turns into a regional war, it could cause a shock to oil prices that could ignite inflation around the world.

The World Bank said last October that its worst-case scenario was an outcome similar to the 1973 Arab oil embargo, which occurred during the Arab-Israeli War. Disabling this risk could remove up to eight million barrels of oil per day from the market and push prices up to $157 per barrel.

This week, oil prices jumped more than 8% after Iran fired nearly 200 missiles at Israel, which pledged to respond. They rose on Thursday after President Biden, when asked whether he would support an Israeli strike on Iranian oil facilities, said: “We are discussing that.” “I think that would be a little…anyway.”

Economists are watching the development closely as they consider updating their forecasts.

“As long as the conflict remains confined to the Middle East, the primary impact on the US economy will likely be through energy prices,” said Michael Feroli, chief US economist at JP Morgan.

Analysts at Capital Economics noted on Wednesday that Iranian oil makes up only 4 percent of global supplies, but disrupting its production could have a significant impact on prices. This could be exacerbated if there were disturbances in the Strait of Hormuz, through which much of the region’s oil and gas is shipped.

But they noted that Saudi Arabia could increase production to make up for lost Iranian oil, and said oil prices would likely rise to $90 a barrel from the current price of about $75 until central banks start worrying about inflation.

“It’s also critical that we determine how long this is going to last until it really moves the needle for central banks,” David Oxley, chief climate and commodities economist at Capital Economics, said at a news conference. “For that to happen, we would have already seen a much greater escalation in hostilities.”

As a rule of thumb, a $10 rise in the cost of a barrel of oil translates into a 24-cent increase in the cost of a gallon of gasoline, which in turn will raise monthly income, said Omair Sharif, founder of Inflation Insights. The Consumer Price Index measures 0.3 percentage points.

“This could lead to second-order effects such as higher airfares and higher diesel costs that boost the prices of some commodities, but you would need to see a significant and sustained increase in oil for that to happen,” he added in an email.

Then there is the economic anxiety in the United States about the effects of Hurricane Helen.

According to AccuWeather, damages and economic losses from the storm, which dumped more than 40 trillion gallons of rain, could total between $145 billion and $160 billion. This could hurt consumer spending in states such as Alabama, South Carolina, Georgia, Florida, North Carolina, Virginia and Tennessee.

There may also be a temporary slowdown in government revenues. The Internal Revenue Service has given businesses and individuals in hurricane-affected areas additional time to make tax payments.

While storms tend to have little impact on overall economic output, new cracks in the nation’s supply chain — a possibility raised when 45,000 workers at East Coast and Gulf Coast ports went on strike Tuesday — would be a different matter. But the union representing the workers, the International Longshoremen’s Association, agreed on Thursday to suspend its strike after receiving an offer of better wages from port employers.

Supply chains are resilient enough that a strike of just a few days would have little impact on the U.S. economy, said Samuel Toombs and Oliver Allen, economists at Pantheon Macroeconomics. Short strikes by workers on the West Coast in 2002 and 2015 had no noticeable effect.

The Biden administration has been closely monitoring the potential ramifications of the port strike on the supply chain, and officials said they do not expect there to be an immediate impact on energy, food or medicine supplies.

Vice President Kamala Harris said this week that she stood with longshoremen, who she said deserved their “fair share” of the profits made by foreign-owned shipping companies.

Former President Donald J. Trump blamed the Biden administration for failing to help the two sides reach an agreement, and said the dispute reflected the pressure workers were under due to inflation. He warned that an extended strike would only make matters worse.

“It is a devastating event for the economy,” Mr. Trump said. He said in Wisconsin Tuesday. “It’s also devastating for inflation, because everything will cost more because of it.”

Jenna Smialek and Daniel Kay Contributed to reports.