3 predictions for how Iran-war supply-chain disruptions will impact the US economy

• There are three main scenarios related to supply chain damage from the Iran war, TS Lombard said.
• The firm's projected paths include a recession, an inflation surge, and a re-acceleration for the US economy.
• It believes supply chains will likely be scarred long-term from disruptions due to the war.

The supply-chain chaos stemming from the Iran war is likely to play out in one of three ways, according to TS Lombard.

In a recent note to clients, the investment research firm laid out the varying economic scenarios that could result from the situation in the Middle East, with the Iran war still choking off flows of oil and other commodities through the Strait of Hormuz.

In all cases, supply chains look like they're going to see "scarring" from the war, a situation where there are long-term premiums on goods that pass through the Strait, according to Freya Beamish, the chief economist of GlobalData TS Lombard.

"We all can't wait to get back to re-acceleration trades but the longer this goes on," Beamish wrote on Friday. "No matter the outcome, there will be scarring - a rent built into energy prices," she later added.

The supply chain-related damage from the war is already visible at the gas pump. The national average price for regular gas rose past $4 a gallon this week as oil prices have climbed, according to the AAA.

Reduced traffic through the Strait of Hormuz is also expected to raise prices fertilizer, helium, and other critical goods in the economy.

Here are the three ways the firm says the supply chain damage could play out in the US:

1. Inflation rises temporarily while the economy enters a recession

If oil prices remain high, US inflation will likely remain elevated, a factor that could help push the economy into a recession, Beamish said.

Higher oil prices have been the predominant fear hanging over markets. The concern is that more expensive crude could feed into price growth across other parts of the economy, adding further inflationary pressure at a time when US consumers already look burdened.

In this scenario, an economic downturn could be worsened by AI adoption in the US, Beamish added, pointing to widespread fear that artificial intelligence could prompt more layoffs as firms seek to cut costs.

"If AI is adopted in response to a recession instead of demand-led growth, it will compound the recession - businesses can either augment existing labour in an expansion or displace it in a contraction and the path not taken might never be recovered," she wrote.

2. Stagflation

This scenario involves inflation remaining "high & sticky," which limits economic growth, Beamish said.

Stagflation, often considered to be one of the worst-case scenarios for markets and the economy, describes a situation where inflation remains hot while economic growth is sluggish — the same dynamic that caused the US to enter a severe downturn in the 70s. It's thought to be even more difficult for policymakers to resolve than a typical recession, since high inflation will put a lid to how many rate cuts the Fed can issue to boost the economy.

More forecasters have warned of stagflation risks recently, especially considering that inflation figures were above-target prir to the start of the Iran. Consumer price growth clocked in at 2.4% year-over-year in February, while the Atlantic Fed estimates that annualized GDP growth came in at a mild 1.6% for the first quarter.

3. Delayed re-acceleration, then an inflation surge next year

This is one of the more optimistic scenarios, though it still involves inflation surging.

If oil prices were to quickly drop back to around $80 a barrel, the US economy could gradually re-accelerate, going back on its growth path, Beamish said.

But, later down the line, that growth could end up pressuring the labor supply, causing inflation to re-accelerate sometime in 2027, she speculated.

The US is in a labor shortage, thanks to factors like the aging population, reduced immigration levels, and declining participation in the workforce. If demand for workers continues to exceed supply, wages will rise as companies are willing to pay more to acquire workers, which feeds into inflation.

"Either way, US inflation is going to be significantly above target on average over the next two years," Beamish estimated.