The US economy defies the rules: 100 days into the Oil shock and the recession signal is still missing

More than three months after the start of the Iran war and the resulting disruption to global energy markets, the US economy continues to display remarkable resilience. The conflict has triggered a sharp rise in Oil prices, reignited inflationary pressures and fueled widespread concerns about a potential economic slowdown. Yet, most of the key indicators released since the beginning of the conflict suggest that economic activity remains solid.

While inflation has clearly accelerated and consumer confidence has deteriorated, the labor market remains relatively stable, business activity continues to expand and household spending has so far resisted the loss of purchasing power caused by higher energy costs.

The contrast between gloomy sentiment surveys and resilient hard economic data has become one of the defining features of the US economy in recent months.

The Oil shock has not derailed economic activity

Historically, major Oil price shocks have often preceded periods of economic weakness in the United States (US). This time, however, the impact appears more limited.

West Texas Intermediate (WTI) US Oil has risen by more than 35% since the beginning of the conflict, increasing costs for households and businesses alike. The Federal Reserve's (Fed) latest Beige Book notes that energy-related costs linked to the Middle East conflict have become the primary source of inflationary pressure, with spillovers affecting transportation, groceries, packaging and fertilizers.

Despite this, activity indicators remain firmly in expansion territory. The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) rose to 54 in May, while the ISM Services PMI climbed to 54.5. Both readings point to continued growth across the economy and stand in stark contrast with recession fears that intensified following the outbreak of the conflict.

Jonathan Golub, Chief Equity Strategist at Seaport Research Partners, recently said to CNBC that business demand remains in "clear expansion mode," noting that consumers have yet to show significant weakness despite higher gasoline prices.

Part of this resilience may stem from structural changes within the US economy. As Eswar Prasad, Senior Professor of Trade Policy and Economics at Cornell University, recently told Fortune: "The US is not the manufacturing powerhouse it once used to be." Prasad argues that the growing importance of the services sector has helped cushion the economy from the impact of higher energy prices, while America's position as a net Crude exporter provides an additional buffer against the current Oil shock.

The US labor market remains remarkably stable

Perhaps the strongest argument in favor of economic resilience comes from the labor market. While economists continue to warn that higher energy prices could eventually weigh on hiring, the latest employment data show little evidence of a significant deterioration.

Job Openings and Labor Turnover Survey (JOLTS) Job Openings increased to 7.618M in April, the highest level since May 2024 and well above expectations. The data suggest that labor demand remains healthy despite heightened uncertainty. Meanwhile, the ADP Employment Change report showed 122K private-sector jobs added in May, the strongest reading in more than a year.

Signs of cooling are nevertheless emerging. Weekly Initial Jobless Claims have been trending higher since late April and reached 225K during the week ending May 29. Even more notably, the 4-week average reached its highest level since the start of the war at 214.75K.

However, Continuing Jobless Claims remained relatively steady, printing at 1.777 million during the week ending May 22, below the 1.847 million recorded during the final week of February, immediately before the conflict began.

The upcoming Nonfarm Payrolls (NFP) report is expected to show a further moderation in hiring, with economists forecasting 85K jobs created in May after gains of 115K in April and 185K in March. Nevertheless, the Unemployment Rate is expected to remain stable at 4.3%, still below the 4.4% level recorded before the outbreak of the war.

The labor market's resilience reflects several structural factors, as the Fed's Beige Book has described the current environment as a "low-hire, low-fire" labor market, where companies have become more cautious about hiring but remain reluctant to lay off workers amid persistent labor shortages.

At the same time, business activity remains in expansion territory while manufacturing hiring has been supported by defense-related demand and growing investment in data centers, helping offset weakness in other sectors.

Inflation is emerging as the main economic headache

If the broader economy has so far absorbed the shock remarkably well, inflation is proving to be the clearest and most immediate consequence of the Iran war. The Consumer Price Index (CPI) accelerated to 3.8% YoY in April, up sharply from 2.4% in February and its highest level since May 2023. The Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation gauge, also climbed to 3.8%, while core PCE reached 3.3%, its highest level since November 2023.

Importantly, inflationary pressures are no longer confined to energy prices alone. Core CPI, which excludes Food and Energy, increased to 2.8% from 2.5% before the conflict began, suggesting that higher Oil prices are gradually feeding through to other parts of the economy.

Rising inflation expectations may prove even more concerning. The University of Michigan's 1-year Inflation Expectations measure jumped to 4.8% in May from 3.4% before the conflict began, reflecting growing concerns among households that higher prices could persist for longer. Such a sharp increase raises the risk that consumers and businesses begin adjusting their behavior to a higher-inflation environment, potentially making price pressures more difficult to contain.

So far, however, there is limited evidence that higher inflation is translating into stronger wage pressures. Average Hourly Earnings rose by 0.2% MoM and 3.6% YoY in April, remaining relatively contained despite the sharp rise in consumer prices. Economists expect wage growth to come in at 0.3% MoM and 3.4% YoY in May. If confirmed, these figures would suggest that labor costs are not yet accelerating at a pace consistent with a self-reinforcing inflation cycle.

For now, the Iran war appears to be creating more of a stagflationary risk than a recessionary one. The combination of stronger inflation, resilient growth and a still-solid labor market leaves the Federal Reserve with limited room to respond should economic conditions begin to weaken later this year.

US consumers are feeling the pressure, but spending remains resilient

Perhaps the most striking divergence in the US economy is the contrast between consumer sentiment and actual spending behavior. The University of Michigan Consumer Sentiment Index fell to 44.8 in May from 56.6 in February, reflecting growing frustration over higher fuel costs and rising inflation. The decline suggests that households are becoming increasingly concerned about their purchasing power and the broader economic outlook.

Yet spending data tells a very different story. Retail Sales rose 0.5% MoM in April following a 1.6% increase in March. On a yearly basis, Retail Sales accelerated to 4.9%, up from 4% in February, indicating that consumers continue to spend despite the sharp increase in energy costs.

Part of this resilience may reflect consumers bringing forward purchases in anticipation of further price increases. As Scott Anderson, Chief US Economist at BMO Capital Markets noted, households appear to have "moved forward some planned purchases to get ahead of any further inflationary spike due to the war." Such behavior is common during periods of rising inflation expectations, as consumers seek to avoid paying higher prices in the future.

This interpretation suggests that some of the recent strength in spending may not be entirely sustainable. If households are accelerating purchases today, consumption could weaken in the coming months as those purchases are effectively borrowed from future demand.

Other indicators point to a growing strain on household finances. Several reports note declining savings rates, rising credit card usage and increasing pressure on lower-income consumers, who are more exposed to higher food and energy costs. The Fed's Beige Book describes an increasingly "K-shaped economy," where higher-income households continue to spend relatively freely while middle- and lower-income consumers become more cautious.

For now, consumer spending remains one of the economy's main sources of support. However, it may also prove to be one of the most vulnerable areas if elevated inflation and energy prices persist through the second half of the year.

Why is the US economy holding up better than expected?

Several factors help explain why the economy has so far absorbed the shock. First, the US economy entered the conflict from a position of relative strength. Economic growth remained solid throughout 2025, providing a stronger starting point than during many previous geopolitical crises.

Second, labor market conditions remain sufficiently healthy to support household income and consumption. Third, consumer spending continues to benefit from higher-income households, which account for a disproportionate share of total expenditure and are less affected by rising gasoline prices.

Finally, strong investment linked to Artificial Intelligence remains a major source of support for economic activity. Bank of America and the Organisation for Economic Co-operation and Development (OECD) both identify AI-related capital expenditure as one of the key drivers of growth in 2026, helping offset some of the drag created by higher energy prices.

The key risks to watch in the coming months

Despite its resilience, the US economy is far from immune to the consequences of a prolonged conflict. The most immediate risk remains energy prices, as a sustained disruption of shipping through the Strait of Hormuz could trigger another leg higher in Oil prices and further fuel inflationary pressures.

A second risk is that inflation may continue to erode household purchasing power. While spending has remained resilient so far, consumer sentiment indicators suggest that households are becoming increasingly uncomfortable with the higher cost of living.

The labor market also warrants close attention. Most economists agree that employment tends to react to energy shocks with a lag, meaning that the full impact may not yet be visible in current data.

Finally, a prolonged period of elevated energy costs could weigh on corporate investment, including energy-intensive sectors linked to artificial intelligence, which many analysts currently view as a critical pillar of US economic growth.

For now, however, the data continue to tell a surprisingly consistent story. Inflation has undeniably reaccelerated since the start of the Iran war, but beyond higher prices, there is little evidence that the war has significantly weakened the broader US economy. 

Whether that resilience can persist through the second half of the year will depend largely on the trajectory of Oil prices, inflation and the labor market.