The escalation of conflict involving Iran has positioned oil prices as the central variable impacting the US economy. According to analysis, Goldman Sachs, in a March 11 report, forecasts that the average price for Brent crude will be $98 per barrel in March and April. This represents an increase of approximately 40% compared to the projected average for 2025, with a subsequent gradual decline to $71 per barrel by the end of 2026. Based on this revised oil price trajectory, Goldman Sachs has conducted a comprehensive assessment of the US-Iran conflict's impact on the US economy. The firm has postponed its expectation for the first interest rate cut from June to September, followed by another cut in December. It also warns that during historical geopolitical events that inflicted the deepest economic damage—such as the Gulf War and 9/11—stock market declines consistently exceeded average levels. Specifically, Goldman Sachs has raised its forecast for headline PCE inflation in December 2026 by 0.8 percentage points to 2.9%. Under an extreme scenario, a spring peak could reach 5%. The Q4/Q4 GDP growth forecast for 2026 was lowered by 0.3 percentage points to 2.2% (which translates to 2.6% for the full year). The projected peak unemployment rate was increased to 4.6%, and the probability of a recession within the next 12 months rose from 20% to 25%. Oil prices are identified as the primary transmission mechanism, with Brent crude potentially surging to $145 per barrel. Goldman Sachs commodity strategists assert that the main channel through which the US-Iran conflict affects the US economy is oil prices. In the baseline scenario, Brent crude is expected to average $98 per barrel in March and April, about 40% higher than the 2025 average, before gradually declining to $71 per barrel by Q4 2026. However, upside risks are significant:
* Adverse Scenario: If disruptions to oil flow through the Strait of Hormuz persist for about one month, Brent crude would average $110 per barrel in March and April, retreating to $76 per barrel by Q4 2026. * Extreme Adverse Scenario: If a Strait of Hormuz disruption lasts up to 60 days, oil prices could average as high as $145 per barrel in March and April, remaining elevated at $93 per barrel by Q4 2026.
Goldman's rule of thumb indicates that a sustained 10% increase in oil prices raises headline PCE inflation by 0.2 percentage points and core PCE inflation by 0.04 percentage points, while reducing GDP growth by approximately 0.1 percentage points. If the oil price increase is temporary and gradually fades, the growth impact is roughly half of these figures. Concurrently, the Goldman Sachs Financial Conditions Index has tightened by about 0.2 percentage points, and the Federal Reserve's Geopolitical Risk Index has rapidly climbed to four times its historical average. Historical analysis shows that economic damage stems from more than just oil prices. Reviewing past geopolitical conflicts, Goldman Sachs draws three key conclusions. First, oil price shocks typically persist longer than periods of tightened financial conditions. Historically, the 1973-1974 OPEC oil embargo caused a 452% surge in oil prices, and prices doubled during the Gulf War. However, the US economy's sensitivity to oil shocks is now significantly lower than in the past, due to a reduced oil intensity of GDP and the rise of shale oil, where increased domestic energy capital expenditure can partially offset declines in real income and consumer spending when prices rise. Second, the economic impact of geopolitical risk extends beyond oil prices alone. Federal Reserve research indicates that when geopolitical risk shocks and oil price shocks coincide, the drag on core business capital expenditure and monthly employment is approximately double that of a geopolitical risk shock alone. Third, stock market sell-offs and collapses in confidence are common features of the most damaging economic scenarios. During the most severe recent geopolitical events—the Gulf War and 9/11—stock market declines exceeded averages, consumer confidence plummeted significantly, and the Gulf War was accompanied by a major oil price spike. The combination of these factors creates the most severe impact. Economic forecasts are revised downward across the board: higher inflation, pressured growth, and rising unemployment. Based on the new oil price forecast, historical experience, and details from the February CPI report, Goldman Sachs has comprehensively revised its US economic outlook: Inflation Forecasts (Revised Upward):
* Headline PCE inflation forecast for December 2026 raised by 0.8 ppt to 2.9%; core PCE forecast raised by 0.2 ppt to 2.4%. * Under the adverse oil price scenario, headline PCE would reach 3.3%, with a spring peak of 4.5%; core PCE would be 2.5%. * Under the extreme adverse scenario, headline PCE would reach 4.0%, with a spring peak of 5%; core PCE would be 2.7%.
Growth Forecasts (Revised Downward):
* 2026 Q4/Q4 GDP growth forecast lowered by 0.3 ppt to 2.2% (2.6% annual basis). * Under the adverse oil scenario, GDP growth would be 2.1% (Q4/Q4) or 2.5% (annual). * Under the extreme adverse scenario, GDP growth would be 1.9% (Q4/Q4) or 2.4% (annual).
Labor Market (Deteriorating):
* Projected peak unemployment rate increased from 4.44% in February to 4.6% (expected to peak in Q3 2026).
Recession Risk (Rising):
* Probability of recession within the next 12 months increased by 5 percentage points to 25%. This is 10 percentage points above the long-term unconditional average but aligns with the latest Bloomberg consensus forecast.
Fed Rate Cuts Delayed: First Cut Pushed from June to September. Goldman Sachs previously expected the Fed to cut rates by 25 basis points each in June and September. It has now delayed both cuts to September and December, maintaining a terminal rate forecast of 3%-3.25%. A September cut is contingent on further softening in the labor market alongside continued improvement in core inflation. However, the firm establishes a clear priority: if employment deteriorates faster than expected, inflation concerns stemming from oil prices would not prevent the Fed from cutting rates earlier. The February jobs report has kept this concern "active," and with downward GDP revisions and rising geopolitical risks, the probability of further labor market weakness is increasing. In its scenario analysis, Goldman Sachs assigns the following probabilities:
* Baseline Scenario (one cut each in September and December): 40% probability. * High Inflation/High Growth/High Terminal Rate Scenario (higher-for-longer rates): 20% probability. * Preemptive Cutting Scenario: 15% probability. * Recession Scenario (significant cuts): 25% probability.
Across these four Fed path scenarios, the probability-weighted forecast path remains more dovish than current market pricing—implying that if the recession scenario (25% probability) materializes, markets may be underestimating the extent of actual Fed easing.
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