(Washington) Suddenly, two new dangers darken the outlook for the American economy, just as an improvement seemed to be taking shape: the crisis in the Middle East and the devastation of several states in the South-East, ravaged by the hurricane Helene.
These events occur as the United States seemed to be heading towards a “soft landing” of the economy, having curbed inflation without falling into recession. Polls even showed that consumer gloom was beginning to fade. But in just one week, all this seems compromised.
The war and Helene
The price of oil is soaring and the passage of the hurricane could result in a bill of 100 billion dollars. A third major crisis was averted on October 3, when dockworkers in eastern ports ended their strike, after an agreement in principle on wages. Economists had warned about the consequences of this work stoppage launched two days earlier.
“Uncertainty has returned,” said Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics. “If oil production in the Middle East weakens and ports are shut down, that will spur inflation. »
PHOTO AVISHAG SHAAR-YASHUV, ARCHIVES THE NEW YORK TIMES
An Israeli army tank near the Lebanese border on September 29, 2024. Israel announced the 1er October that its troops were carrying out operations in Lebanon aimed at destroying Hezbollah’s military infrastructure in villages near the border.
This uncertainty comes against an election backdrop where the economy – particularly inflation – is a major issue and a month after the Federal Reserve began cutting interest rates. The central bank estimates that the inflation rate is approaching the 2% target, but it fears the return of unemployment.
Even before these new risks, the International Monetary Fund predicted a slowdown in the U.S. economy in 2025.
Pessimistic scenarios
The escalation of conflict in the Middle East is the greatest risk to the global economy.
For the past year, economists have been warning that if the fighting between Israel and Hamas turns into a regional war, it could cause an oil shock and reignite inflation around the world.
The most pessimistic scenario mentioned by the World Bank in October 2023 was similar to the Arab oil embargo of 1973, after an Arab-Israeli war. Such a disruption could remove 8 million barrels of oil per day and send prices up to US$157 per barrel.
This week, oil prices jumped more than 8% after Iran launched nearly 200 missiles at Israel, which vowed to retaliate. They climbed Thursday after President Joe Biden, asked about his support for an Israeli attack on Iranian oil facilities, said: “We are discussing it. »
Middle Eastern powder magazine
Economists are monitoring the situation closely and may update their forecasts.
“As long as the conflict remains contained in the Middle East, the impact on the U.S. economy will likely be limited to energy prices,” said Michael Feroli, chief U.S. economist at JP Morgan.
Analysts at Capital Economics noted Wednesday that Iranian oil represents only 4% of global supply, but disruptions to its production could have a significant impact on prices. This effect could be amplified in the event of disruptions in the Strait of Hormuz, through which much of the region’s oil and gas passes.
PHOTO SYDNEY MILLIGAN, US NAVY, PROVIDED BY THE NEW YORK TIMES
The USS amphibious assault ship Wasp, currently off the coast of Lebanon and Israel. The United States has strengthened its military presence in the Middle East in the face of the risk of an escalation of the conflict between Israel and Iran, which would have serious economic consequences.
They note, however, that Saudi Arabia could increase its production and compensate for the loss of Iranian oil. They say oil prices would have to reach US$90 per barrel (it’s around US$75 today) for central banks to start worrying about inflation.
Much would depend on how long higher prices last, said David Oxley, chief climate and commodities economist at Capital Economics. “For central banks to act, there would need to be a much greater escalation of hostilities,” he says.
And, on the American continent, the effects of the hurricane Helene are also a source of concern.
AccuWeather estimates that damages and economic losses caused by the storm could amount to US$145 billion to US$160 billion. This would reduce consumer spending in Alabama, South Carolina, Georgia, Florida, North Carolina, Virginia and Tennessee.
PHOTO LOREN ELLIOTT, THE NEW YORK TIMES
Road destroyed by floods after hurricane Helene in Asheville, North Carolina
There are also fears of a temporary slowdown in public revenues.
US tax authorities have granted businesses and individuals in affected regions an extension to pay their taxes.
Storms generally have little impact on overall economic output, but they can break the country’s supply chain.
The longshoremen’s strike, finally suspended Thursday evening, would also have had an impact on the economy. Ports on the East Coast and Gulf of Mexico – comprising 14 major ports and a host of smaller ports – transport about a quarter of U.S. imports and exports. It would have weighed on manufacturing and retail, leading to job losses.
PHOTO ADAM KUEHL, THE NEW YORK TIMES ARCHIVES
Longshore workers on strike at the port of Savannah, Georgia, on October 2. In the end, the strike lasted only two days.
The Biden administration is closely monitoring the supply chain impacts of the strike and officials say there will be no immediate effect on the supply of energy, food or medicine.
“The Supply Chain Disruption Task Force is prepared to respond quickly to minimize potential disruptions in the event of a prolonged strike,” White House spokeswoman Robyn Patterson said.
This article was published in the New York Times.
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