Economic Damage From Iran War ‘Increasingly Evident,’ S&P Global Says

Why It Matters

The data signals that geopolitical tension is feeding cost pressures and dampening business confidence, prompting the Federal Reserve to consider tighter monetary policy, which could further slow an already fragile U.S. economy.

Key Takeaways

• S&P PMI shows second month of stagnant manufacturing growth
• Service‑sector optimism falls to weakest level since April 2025
• Energy costs up 17.9% with gasoline +28.4% and fuel‑oil +54.3%
• FedWatch shows 52.8% chance of rate hike this year

Pulse Analysis

The S&P Global composite Purchasing Managers' Index (PMI) for May revealed a continuation of lackluster growth in the manufacturing sector, marking the second straight month of stagnation. While manufacturers reported a modest uptick in new orders driven by precautionary stock‑building, the broader business outlook remains clouded by the escalating economic fallout from the Iran conflict. Companies cite higher input costs and supply‑chain disruptions as key headwinds, echoing earlier surveys that flagged inflationary pressure as a primary concern for U.S. firms.

Federal Reserve policymakers are now grappling with a more aggressive stance as inflation climbs to a three‑year peak of 3.8% and energy prices surge nearly 18% year‑over‑year. The CME FedWatch tool indicates a 52.8% probability that the Fed will raise its benchmark rate by at least a quarter‑percentage point this year, a stark shift from a month ago when no hike was anticipated. Statements from Philadelphia Fed President Anna Paulson and Richmond Fed President Tom Barkin underscore the growing consensus that tighter monetary policy may be necessary to anchor inflation expectations and prevent a prolonged price‑shock cycle.

Looking ahead, the economy is projected to expand at just over 1% annualized in the second quarter, a pace that may be unsustainable if cost pressures persist. The war‑driven energy shock mirrors the 2022 crisis, with gasoline and fuel‑oil prices jumping 28.4% and 54.3% respectively, eroding consumer purchasing power and squeezing corporate margins. For businesses, the confluence of higher financing costs, volatile energy markets, and subdued demand creates a challenging environment that will likely drive strategic adjustments in pricing, inventory management, and capital allocation.