Why the economy, and Trump, can't take Iran war shocks anymore

Four months into the war in Iran, the U.S. economy is still on its feet, but the ground beneath it is shifting fast, and both Wall Street and Washington are starting to feel it.

Goldman Sachs chief economist Jan Hatzius said Monday that the global economy is holding together, describing its condition as “bending, not breaking.”

His note had questions many investors are already asking. Why is the stock market performing well if the mood among market participant is extremely negative.
Hatzius has given three reasons for market’s split behavior.

Since countries had stockpiled oil ahead of the war, the prives didn’t reach where the anxieties were. It did cause shortage of products like jet fuel, but Hatzius mentioned it as “relatively painless” as airlines trimmed schedules on lower priority routes.

Secondly AI boom with massive spending kept the investors distracted with confidence in the markets. This was enough to keep S&P 500 and Nasdaq at theit all time highs.

That doesn’t mean if all is well yet, the end will be well aswell. The bank’s yearly recession probability has fallen to 25% from 30%. However it sits 5% above the levels before war.

Economists expect for slower consumer spending when the tax refund money dries up. Moreover the gas prices will keep rising and wage growth will be down aswell if the war keeps going on.

Hatzius also said that AI won’t keep the markets afloat longer either. Fewer jobs in units of economic growth with higher electronic prices are piling on the inflation pressures which are already getting out of control.

Inflation at a two-year high as war costs hit home

The damage is already visible at the pump. A gallon of regular gasoline averaged $4.52 on Monday, up from $3.14 a year ago, according to AAA. Prices rose 0.9% in April alone, pushing the annual inflation rate to 3.3%, the highest since April 2024. Americans are spending more on fuel and energy, leaving less for everything else.

April’s jobs report offered brief relief. The economy added 115,000 jobs last month while the unemployment rate held at 4.3%. But economists warned against reading too much into it.

Joe Brusuelas, chief economist at RSM, described the labor market as a “low-hire, low-fire” situation, stable on the surface but not growing. Guy Berger, chief economist at Homebase, called the report “a signal of what could have been,” adding that he feels “more worried” about what lies ahead.

Part of what is keeping unemployment from rising is that the workforce itself has shrunk. The administration’s immigration and deportation policies have removed roughly 600,000 people from the labor pool, which flatters the unemployment rate without reflecting a stronger jobs market.

Kathryn Anne Edwards, an economist and co-founder of Optimist Economy, said the labor market is in no position to absorb a new wave of job losses.

If that changes, she said, “this would look like a bad recession.” She warned that manufacturers and business leaders are largely just waiting out the uncertainty, and that the Iran war could prove to be “a bridge too far” for hiring and investment decisions.

With midterms approaching, Trump’s economic standing is weak

For Trump, the numbers are bad. AYouGov poll conducted between May 1 and 4 found that only 38% of registered voters approve of his handling of the economy, while 69% disapprove of his response to rising prices.

Democrats need to flip just eight of 18 competitive House districts to take control of the chamber. A surge in unemployment could make that considerably easier.

Trump has tried to get ahead of the problem, floating the idea of suspending the federal gas tax and easing restrictions on beef imports. But on Monday he said the ceasefire with Iran is “on massive life support,” sending stocks lower and oil prices higher again.

The war that has already bent the economy may yet be the thing that breaks it.