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MarketsAI Desk•5 views

US Labor Market Frozen Amid Iran War, Could Remain Stagnant

The US labor market, which saw weak job growth in 2025, is threatened by the Middle East conflict that has spiked oil prices and economic uncertainty. Experts predict stagnation with low hiring, unemployment rising to 4.7%, and a 40% recession risk. Higher energy costs are straining consumers, who account for most economic activity, potentially reducing spending and hiring. While tax refunds offer short-term support, prolonged geopolitical tensions could deepen labor market challenges. Upcoming data releases will clarify these trends.

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US Labor Market Frozen Amid Iran War, Could Remain Stagnant

The US labor market, already weak in 2025, faces heightened risks of prolonged stagnation due to the ongoing military conflict in the Middle East, which is spiking energy costs and economic uncertainty.

Stagnant Hiring and Rising Unemployment

  • Employment growth in 2025 was minimal, with only 116,000 jobs added annually, compared to approximately 121,000 per month in 2024.
  • Experts forecast a "jobless expansion" with monthly job gains of around 20,000 in early 2026.
  • Unemployment is projected to rise from 4.4% to 4.7% by year-end, with a recession risk estimated at 40%.
  • The market dynamics are characterized by "few hires and few fires," delaying rather than canceling hiring plans.

Geopolitical Conflict Drives Economic Disruption

  • The four-week conflict between the US/Israel and Iran has disrupted critical maritime routes, causing oil prices to surge by about $30 per barrel.
  • Gasoline prices have increased by $1 to an average of $3.98 per gallon, with energy costs potentially reducing household income by over $1,350 annually.
  • Supply chain issues and inflation fears are intensifying, with the OECD projecting US inflation to reach 4.2% in 2026.

Consumer Spending Faces Pressure

  • Consumers, who drive two-thirds of US economic activity, are allocating more to energy and gasoline, with some advancing purchases due to anticipated price hikes.
  • Higher tax refunds (10% above last year) provide temporary relief, but sustained spending is uncertain amid rising costs.
  • If consumer spending declines, it could negatively impact the labor market's health.

Expert Analysis and Upcoming Data

  • Heather Long, chief economist, warns that if oil prices remain above $100 and the Strait of Hormuz stays closed, it could "change the game" for the economy, potentially reigniting layoffs.
  • Gregory Daco of EY-Parthenon notes that uncertainty is delaying hiring plans, with a risk that prolonged pauses could lead to more visible weakening by late spring.
  • Laura Ullrich of Indeed Hiring Lab describes the market as "stable but stagnant," with no drastic improvements or deteriorations yet observed.
  • New labor market data, including job turnover, private-sector hiring, layoffs, and the monthly employment report, is scheduled for release this week.
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