Will the Middle East conflict lead to an economic recession in the United States?

The post-pandemic U.S. economy has demonstrated remarkable resilience, with a series of shocks and crises—including soaring inflation, the Russia-Ukraine conflict, and increased tariffs—failing to bring it down. Experts and analysts have continually predicted an “inevitable recession,” echoing the same narrative in 2024 as they did after Trump raised tariffs last year, yet none have come true.

Now, executives understandably question: Will the U.S. war with Iran, swept up in the U.S.-Israel conflict in the Middle East, ultimately trigger an economic recession? While the war’s impact on headlines and energy prices is evident, its economic implications are far less clear. Wars always compel analysts to make unreliable macroeconomic forecasts amid unknowable geopolitical turmoil.

In this context, the best thing leaders can do is to think deeply about the geopolitical drivers and the channels through which the energy crisis transmits to the real economy. Although this conflict may lead to multiple headwinds converging to push the U.S. economy into recession, it’s by no means a foregone conclusion.

**The Pitfall of Historical Lessons
**

During times of geopolitical turmoil, experts and analysts often turn to history for precedents and templates. History is replete with cases of energy crises but is also prone to misinterpretation.

Take the 1990 recession as an example. The Gulf War triggered a spike in oil prices, delivering a final blow to an already fragile U.S. economy weakened by the savings and loan crisis of the late 1980s. At that time, the economy was far more sensitive to oil prices than it is today, with energy consumption per unit of output twice what it is now. After Operation Desert Storm, oil prices returned to moderate levels, clearing that obstacle for recovery. Context is crucial.

Drawing lessons from the 1970s oil crisis is tempting but fraught with risks. The surge in energy prices caused significant damage as inflation expectations “de-anchored,” meaning high energy prices transmitted unimpeded to interest rates, severely undermining the effectiveness of monetary or fiscal policy in responding to economic weakness. Today, however, inflation expectations remain firmly anchored.

History is unique and has no fixed formula. What matters today?

**Duration is More Important than Price
**

While oil prices often make headlines, the duration of price volatility is more important than the price level itself. An oil price of $300 sustained for a few days is far better than $150 maintained for several months.

As the war enters its third week, with escalating attacks on upstream oil facilities by both sides, a “day-based” short-term duration is becoming increasingly unlikely. The difficulty lies in the fact that no one— including the White House—knows how long the war will last. While Washington can decide to escalate the situation or seek a way out, the decision-making of Iranian leadership is also a factor.

With the Iranian regime steadfast in its position, its impact on energy prices remains highly uncertain, and its strategic considerations may differ significantly from those of the Trump administration.

Though far from absolutely reliable, financial markets may offer the best judgment on possible durations. They continually incorporate new information and generate actual prices that firms can use to hedge future risks. Despite recent oil prices experiencing dramatic volatility of 43% (as of March 19, rising from $67.02 per barrel to $96.14), the futures prices due in late 2026 show a more moderate range of movement, up 23% (from $63.73 to $78.41). In other words, traders generally believe that the duration of the war is limited, and the shock is more an interruption of the low-price mechanism rather than a leap into a high-price mechanism.

**How Shocks Transmit to the Real Economy
**

Even if the length and magnitude of energy price shocks are unknown, we can begin to outline the channels through which these headwinds may slow the economy and potentially push it into recession.

The primary distinction lies between supply disruptions and price shocks. Supply disruptions do not impact all economies equally; the closure of the Strait of Hormuz primarily affects Asian economies and, to some extent, Europe. However, oil prices are global, so they can transmit instantaneously to every corner of the world economy.

For the U.S. economy, there are five channels through which energy prices transmit macroeconomic impacts that are worth considering:

1. Inflation and Real Wages

Rising energy prices push up inflation, resulting in a real wage reduction for consumers who cannot avoid the gas station (declining purchasing power). Real wage growth is expected to be around 0.7% in 2026, making it a key engine for U.S. consumption growth in this economic cycle (the other engine—hiring—has stagnated). A short-term spike in energy prices may only reduce it by about 0.1%, but sustained increases could wipe out all real wage growth this year. Nonetheless, households can buffer the impact of energy shocks on consumption by reducing savings.

2. Wealth Effect

A decline in stock prices acts as a balance sheet shock, suppressing consumption, though we still emphasize its resilience. The current stock market decline (-5%) has yet to meet the criteria for a technical correction (defined as a decline of more than -10%), and even entering a bear market (a decline of -20%) may not trigger an economic recession. In this economic cycle alone, there have been two instances of bear markets without accompanying recessions (in 2022 and 2025). Even if the market falls by 20%, the overall balance sheets of U.S. businesses will remain relatively robust.

3. Investment

Volatility and uncertainty undermine business confidence and investment, leading to project suspensions, delays, or cancellations. Persistently high oil prices may stimulate some investment in the energy sector, but it is insufficient to offset losses in other areas of the economy due to project suspensions, delays, or cancellations. However, the current construction boom in AI data centers, a significant driver of economic growth, is unlikely to be fundamentally shaken by oil price fluctuations (though the sector itself carries risks). Overall, business investment will become another headwind for economic growth, but if the conflict is of limited duration, we expect its negative impact to be relatively mild.

4. Financial Conditions

Volatility in financial markets may increase credit flow and costs, suppressing capital market activity. Most activities of U.S. businesses are not particularly sensitive to oil prices, but market volatility, declining valuations, widening credit spreads, or tightening credit conditions can create friction for companies seeking to hire or invest. The directional impact here is also negative, but we expect its macro impact to be small unless the conflict escalates further.

5. Monetary Policy

Even if the U.S. central bank tends to focus on core inflation rather than energy-driven inflation, a new round of ambiguous inflation data that is above its policy target and continues to rise may diminish its willingness to proactively lower interest rates to support the economy. Since the war began, the market’s expectations for interest rate cuts in the policy path have diminished, confirming this point. This constitutes another growth headwind, though the degree of its impact is relatively limited.

**How Executives Should Respond
**

As senior leaders navigate this latest shock, we recommend:

1. Do not conflate geopolitical crises with macroeconomic crises. The former can lead to the latter, but many geopolitical crises leave no macroeconomic imprint.

2. Analyze rather than predict. In this situation, the best thing executives can do is analyze the driving factors of the shock and their channels of transmission to the economy, reassessing as facts evolve.

3. Reference history cautiously and beware of analogy traps. Differences often provide more insight than similarities. Disabuse yourself of the notion that “history is destined to repeat itself”—every chapter of history is a unique creation.

4. Establish systematic thinking. The nature of economic risk lies not in the shock events themselves but in the state of the system when shocks occur and the complex network of responses that arise among stakeholders.

5. Be wary of the temptation of “doomsday narratives.” Public discourse often favors voices skilled at painting extreme pessimistic scenarios. Understanding downside risks is crucial, but it is essential to remain cautious about tail risks that are of very low probability—one should deeply question: under what extreme circumstances would all the pre-ordained “systemic circuit breakers” fail simultaneously?

**Series of Shocks vs. Multiple Compounding Shocks
**

In recent years, experts have often inferred from shocks and crises, confidently citing historical precedents to predict disasters. Yet, in every instance (inflation, interest rates, war, tariffs), they have misjudged the resilience of the economy. Each shock has brought cyclical risks and uncertainties, but none have been powerful enough to overwhelm economic expansion.

The post-COVID economic expansion has now entered its sixth year, proving resilient yet perhaps also weary, requiring time to recover from each setback. The greatest risk is not a single shock but rather multiple compounding shocks that collectively undermine economic resilience.

But no one knows where a series of shocks will end, nor where multiple compounding shocks will begin. The economy has digested inflation shocks and high interest rates, yet tariffs have struck the economy again—but recession has not occurred.

As we approach the one-year anniversary of Trump’s “liberation day,” just as the economy seems to be laying a more solid foundation, a new shock has suddenly arrived. As the boundary between “gradually digestible continuous shocks” and “unbearable multiple crises” becomes increasingly blurred, the systemic risks facing the economy have become starkly apparent. According to the aforementioned transmission channels, the longer the duration of price increases, the more likely it is to deprive the economy of the necessary support for maintenance.

Philipp Carlsson-Szlezak, Paul Swartz | Written

Philipp Carlsson-Szlezak is the managing director and partner at the Boston Consulting Group’s New York office, as well as the firm’s global chief economist. Co-author of “Shocks, Crises, and False Alarms: How to Assess Real Macroeconomic Risks” (Harvard Business Review Press, 2024). Paul Swartz is the executive director and senior economist at the BCG Henderson Institute, based at the Boston Consulting Group’s New York office. Co-author of “Shocks, Crises, and False Alarms: How to Assess Real Macroeconomic Risks” (Harvard Business Review Press, 2024).

Zhou Qiang | Edited and Reviewed