March 6, 2026
War in the Mideast is spreading and nobody can confidently predict what happens next. Oil prices have surged. The stock market is in retreat. Bond yields have surged. This has to weaken everybody’s outlook for the economy in the months ahead. But by how much? The market’s fear the worst. It is worth noting that the economy had a respectable head of steam before the war broke out and AI will continue to boost productivity and GDP growth in the quarters ahead.
The daily news about the war in Iran is disturbing. Multiple countries have been hit with missiles from Iran. But news sources also report that Iran has lost 75% or more of its rocket launchers and most of its Navy. The U.S. claims that it has complete air superiority and its pilots can bomb at will. But it is also depleting its arsenal of weapons. News reports from a war zone are always subject to considerable bias so who knows exactly what the situation is. Our sense is that after a blizzard of missile launches in the early days of the war things will slow down in the weeks ahead. But what do we know?
The Strait of Hormuz apparently remains open but traffic is minimal. The danger would rise dramatically if the Strait is closed for a protracted period of time. But without its Navy and the ability to mine the Strait can Iran keep it closed? The U.S. military is going to do its best to keep it open. Once again, what do we know.
The fear of what might happen to the flow of oil through that area has caused the price of crude oil to skyrocket to $89 per barrel. That seems like it should be a problem if it lasts.
But the current price is not that much higher than it was in 2024 and GDP growth in that year remained quite steady at about 2.5%. It got hit in the early part of 2025 as Trump’s proposed tariffs took a toll but growth bounced back in the second half of the year.
At the same time the CPI inflation rate continued to fall throughout 2024 despite the high price of oil.
The point is that while oil prices have risen dramatically in the past week or so be careful about reading too much economic weakness and/or worsening of the inflation rate in the months ahead.
If the Fed sticks to its job and keeps growth in the money supply in check, the inflation rate will remain steady. The Fed has finally eliminated all of the surplus liquidity that it created in 2020 and 2021. Historically money has grown at about a 6.0% pace. In the past year it has been growing at about 4.5%. As long as that continues, the inflation rate is not going to accelerate.
The markets were also rattled by the 92 thousand drop in payroll employment in February. While the data seemingly continue to weaken, it is hard to know exactly where the labor market is at the moment. There has been the usual early year benchmark revision to the employment data, wild swings in employment before and after the holiday season, deportation of many foreign workers, and particularly bad weather in January and February. We suggest it is not as weak as it appears at first blush.
In addition to which the employment data conflict with other data series on employment. For example, the employment category of the purchasing managers’ reports for both the manufacturing and non-manufacturing sectors has risen sharply in the past two months even though these two indexes remain at or slightly below the breakeven level of 50.0. In both cases the jobs outlook seems firmer than it was a few months ago, not weaker.
The insured unemployment rate (part of the initial claims or layoffs report) has been unchanged for the past couple of months at 1.2% is exactly where it was prior to the recession. It, too, does not seem to be signaling any particular weakness in the labor market.
The 0.2% decline in retail sales in January was also unnerving. But it came about because of a 0.9% decline in the motor vehicles category and a 2.9% drop in gasoline sales. Excluding the volatile motor vehicles and gasoline categories sales rose 0.3% which is roughly in line with other recent months. In the past year this series has risen 4.4%. In the past three months growth has been 2.6%. Growth appears to have slowed a bit, but the consumer is continuing to spend at a respectable pace.
Given all of the above the stock market has taken a hit. It feels like it is getting crushed. But at its current level of 6,750 it is only 3.3% below the record high level set in late January. It remains a long ways from a 10.0% slide that is generally regarded as a correction.
For what it is worth we have softened our first quarter GDP forecast from 3.3% to 2.5%, but growth for the year has been reduced only slightly to 2.7%.
We are well aware that one can conjure up all sorts of possible military and political outcomes caused by the war with Iran and we know nothing. What is clear is that the war is yet another major uncertainty that the stock, bond, and commodity markets must digest. The recent selloff in all three markets is warranted. All we want to do right now is highlight the fact that the economy had a decent head of steam coming into this period, is being boosted by the productivity increase caused by AI, and has an almost remarkable resiliency. If the Fed keeps money growth in check the inflation rate is unlikely to accelerate. Hang in there for now and let’s see what happens in the months ahead.
Stephen Slifer
NumberNomics
Charleston, S.C.
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