Americans are growing more worried about the Iran war’s economic effects – CNN

Lead

Washington — Americans are growing more pessimistic about the U.S. economy as the Middle East conflict with Iran unsettles markets and pushes energy prices higher. The University of Michigan’s final March consumer sentiment index fell 6% to 53.3, the lowest reading since December, missing economists’ expectations of 54.2 from a FactSet poll. The slide in confidence cut across income groups, including higher-income and stock-owning households, and comes amid a sharp monthly rise in one-year inflation expectations to 3.8%.

Key Takeaways

• University of Michigan consumer sentiment dropped 6% in March to a final reading of 53.3, the weakest since December.
• Economists polled by FactSet had expected a 54.2 reading, so the final print undershot consensus.
• One-year inflation expectations jumped to 3.8% in March from 3.4% in February; five- to 10-year expectations edged down to 3.2%.
• Energy-price pressure from the Iran conflict has contributed to gasoline price increases nationwide over the past month.
• Retail sales were down 0.2% in January after being flat in December, a recent sign of softer spending.
• Labor-market indicators remain mixed: wage growth has outpaced inflation since mid-2023, while unemployment-claims remain historically low despite anemic job growth.
• Analysts warn a protracted war could lift inflation and, if accompanied by a rise in layoffs, could tip the economy into recession.

Background

The consumer sentiment index from the University of Michigan has long been a barometer of how households view their finances, job prospects and prices. March’s drop comes as hostilities between the U.S. and Iran have reignited in the Middle East, sending oil and gasoline prices higher and increasing volatility across U.S. equity markets. Policymakers and investors watch these sentiment measures because public expectations about inflation can influence wage negotiations, spending choices and long-term price-setting behavior.

Historically, dips in sentiment have not always translated into equivalent declines in spending. During episodes such as the 2022 high-inflation period and the 2023 debt-ceiling standoff, Americans reported weak confidence but continued to spend, supported by a still-tight labor market and positive real wage trends in some segments. Nevertheless, consumer spending accounts for roughly two-thirds of U.S. GDP, so sustained sentiment deterioration combined with worsening labor conditions could meaningfully slow growth.

Main Event

The University of Michigan released its final March reading on Friday, revising down earlier estimates and showing a steeper monthly fall in household confidence. Survey director Joanne Hsu said declines were evident across age cohorts and political affiliations, with particularly large drops among middle- and higher-income consumers who hold stock wealth and have felt the combined effects of rising gas prices and market swings.

Financial markets have reacted to heightened geopolitical risk: major U.S. stock indexes swung between gains and losses as investors priced the odds of escalation and the duration of the conflict. The White House has said it is engaged in talks with Iran, but uncertainty about how long the crisis will last has been a key driver of market and consumer unease. Higher crude and retail gasoline prices over the last month have been directly cited by respondents as a factor in their outlook.

Inflation expectations measured by survey respondents rose for the next 12 months but edged lower on longer horizons. One-year expectations climbed to 3.8% in March from 3.4% in February, the largest monthly one-year increase in about a year. In contrast, five- to 10-year inflation expectations ticked down to 3.2%, signaling consumers do not, at present, expect elevated inflation to become entrenched.

Analysis & Implications

The immediate risk is that higher energy costs and market volatility erode household confidence just as spending already shows signs of softness. Retail sales fell 0.2% in January after a flat December, and cold weather likely weighed on that reading — but a sustained pickup in inflation or a deterioration in the labor market could turn temporary weakness into a broader slowdown. Because consumer spending makes up about two-thirds of the economy, a step-up in layoffs or a sharper pullback in hiring would reduce household incomes and spending power quickly.

For the Federal Reserve, the pattern of inflation expectations matters more than short-term spikes. Long-run expectations are used as a proxy for how firmly the public believes the Fed can anchor inflation. The March survey’s slight decline in long-run expectations to 3.2% offers some relief to policymakers, though it still sits above the Fed’s 2% target measured by the Personal Consumption Expenditures (PCE) price index, which ran at 2.8% as of January.

Financial-market reactions add a second channel of risk. Declining equity valuations can trim household wealth and depress spending among affluent consumers — the same group that registered especially large declines in sentiment this month. Economists warn of a K-shaped dynamic: shocks that begin at the top of the income distribution can propagate through financial linkages into broader consumption and investment declines.

Comparison & Data

The table above summarizes the key data points referenced in this report. While the one-year inflation expectation rose notably, longer-horizon expectations remain elevated relative to the Fed’s 2% target. Retail-sales softness precedes the March sentiment drop, suggesting consumer attitudes are responding to a mix of near-term price pressure and already-visible spending weakness.

Reactions & Quotes

Officials and analysts offered immediate responses to the survey results, placing shifts in sentiment in the context of recent market moves and energy-price changes.

“Declines were seen across age and political party. Consumers with middle and higher incomes and stock wealth, buffeted by both escalating gas prices and volatile financial markets in the wake of the Iran conflict, exhibited particularly large drops in sentiment.”

Joanne Hsu, University of Michigan (survey director)

Hsu’s comment accompanied the survey release, emphasizing that the March weakness was broad-based and pronounced among consumers with stock exposure and higher incomes.

“In a K-shaped economy, what impacts the top can quickly spread.”

Heather Long, Chief Economist, Navy Federal Credit Union

Heather Long framed the risk that market-driven losses among wealthier households can transmit to the wider economy, particularly if job losses accelerate and consumer spending contracts.

Unconfirmed

• Whether ongoing talks between the U.S. administration and Iranian counterparts will de-escalate the conflict; public statements indicate discussions are under way but outcomes are uncertain.
• That higher energy prices will fully pass through to broad-based inflation over the next several years; current long-run expectations do not show that as a settled view.
• That layoffs will accelerate to the extent necessary to trigger a recession; jobless-claims data remain low and such a shift has not yet occurred.

Bottom Line

March’s University of Michigan survey underscores growing consumer anxiety tied to the Iran conflict and higher energy costs, with a 6% decline in sentiment to 53.3 and a jump in one-year inflation expectations to 3.8%. Although long-run expectations edged down to 3.2%, they remain above the Fed’s 2% objective and will be watched closely by policymakers.

For now, the U.S. economy retains buffers — historically low unemployment-claims and wage growth that has outpaced inflation since mid-2023 — which have helped sustain spending even amid past sentiment shocks. The critical risk going forward is a protracted conflict that sustains energy-price pressure or a sudden deterioration in the labor market; either would raise the odds of a meaningful slowdown or recession.

Sources

• CNN — news report summarizing the University of Michigan survey and market reaction.
• University of Michigan Surveys of Consumers — academic survey data and official release (academic/institutional).
• FactSet — data firm and source of the economists’ projection referenced in polling (private data firm).