Quarterly Economic Update 

In the last quarter, we have entered a war with Iran that threatens global economic stability. Iran has closed the Strait of Hormuz through which a significant percentage of global shipping traffic should be flowing, already driving gasoline prices over $4.00 per gallon in the U.S. You already know all of this. What we don’t know is the extent of future damage to the U.S. and global economies because of this situation. The first quarter of 2026 still shows a healthy macro economic environment, although consumer sentiment dropped significantly in April.

Macroeconomic Data is Still Strong, Mostly

First quarter GDP will not be released until April 30th. However, the Atlanta Fed’s GDPNow as of April 21st estimates that Real GDP grew at 1.2% annualized in the first quarter. Unemployment remains low and flat at about 4.3% and retail sales in Q1 were 3.7% higher than Q1 2025. Corporate earnings reported by S&P 500 companies are 15.1% higher than last year. So, we were off to a good start economically this year. Recent geopolitical events, however, have made things less certain.

Looking Back at Previous Energy Events

To better understand the potential impact of this event I researched the 1973-1974 oil embargo. OPEC stopped shipping oil to the U.S. in 1973 and gas prices quadrupled and then surged again in 1979 caused by the Iranian revolution. Gas prices never returned to pre-embargo levels, and we entered a cost-push, wage-price inflationary spiral that became systemic, not episodic.  Cost-push inflation occurs when the cost of producing goods and services increase and these costs are passed through to consumers in price hikes. This is generated by wage increases (labor unions were strong in the 70’s), raw material costs (oil), taxes and regulations and supply shocks (war). It is different from demand-pull inflation which occurs when demand exceeds supply, dollars chasing goods. 

This cycle did not end until the then-Chairman of the Fed, Paul Volcker, took interest rates to over 20%. Will this happen again? I don’t think so. Why? Because the U.S. is significantly less energy-dependent than during that period. Our economy is more service-based than manufacturing-based, which also lessens our oil sensitivity. The U.S. has been a net exporter of total energy (oil, gas, renewables and coal) since 2019. We produce approximately 13 million barrels per day (world’s largest producer). But we also import millions of barrels per day, because most of our increase in production is shale oil that is light crude, whereas U.S. refineries are optimized for heavy crude. So, we import heavy oil and export light. Even if we produced our own oil, prices would still be affected by Middle East supply disruptions and overall global demand.

Will this time be different?

We should expect inflationary pressure resulting from higher oil prices. One study I saw estimated the annual total out-of-pocket costs the average household would incur at $100 and $120 per barrel to be $650 to $1,200/year and $1,400 to $2,500/year respectively. It feels worse than the numbers might suggest because it affects necessities and is therefore unavoidable.

While the 1973 embargo triggered very high interest rates and a subsequent recession, there were other contributing factors at play as well. The Federal Reserve was less independent then and succumbed to political pressure to keep rates low to maintain high employment. This resulted in the development of the assumption that prices and wages were always going to go up, and an acceptance of higher inflation. I started my career in 1973 and annual salary increases in the 8% to 10% range were the norm. This continued into the mid 80’s. We have stubbornly fought inflation since then and have a different mindset about it.

In addition to inflation, it is reasonable to expect a slowdown in the growth of GDP over the near term. Stagflation did occur in the 70’s. But the U.S. is a large, diversified service-based economy and a leader in technology development. Therefore, I think we are in a much stronger position to withstand increases in oil prices, depending upon how high they go and for how long, than we were in 1973.

This is a situation we need to observe regularly and carefully to avoid falling into the “this time it’s different” trap. I have, for a long time, been amazed by the strength and resiliency of our economy and this event has not changed my opinion. We will continue to monitor the performance of the economy and will always strive to improve our investment models for long-term success.