Impact of the Iran War on U.S. Consumer Spending and Sentiment

The ongoing conflict in Iran has led to significant increases in oil prices, which analysts predict could adversely affect U.S. consumer spending. Despite a recent surge in retail sales, concerns are mounting about the sustainability of consumer resilience as economic pressures intensify.

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Historically, spikes in oil prices have acted as a tax on consumers, impacting their spending habits. Research from Telsey Advisory Group indicates that while oil price increases typically weaken economic growth, consumer spending is more severely affected during broader economic downturns. Current economic indicators, including rising credit card debt and household delinquency rates, suggest that consumers may face greater financial strain in the near future.

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Tom Sebok, managing partner at the New England Consulting Group, emphasizes that consumers are likely to have less disposable income in 2026 than previously anticipated. He notes that the current economic landscape is mixed, with rising fuel costs and weakening employment contributing to a cautious consumer outlook. Wells Fargo analysts, including Tim Quinlan and Shannon Grein, also highlight that discretionary spending has already begun to slow, indicating underlying vulnerabilities even before the Iran conflict escalated.

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Recent data reveals a 6% year-over-year increase in retail sales for January, despite a decline in consumer sentiment. However, unit demand for discretionary merchandise fell by 3% year-over-year in February, suggesting that consumers are becoming more selective in their purchases. Additionally, tax refunds, which typically provide temporary relief, have increased by only 10% year-over-year, falling short of earlier expectations of a 25% rise.

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While some analysts remain optimistic about consumer resilience, others caution that this optimism may be misplaced. Sebok argues that consumers are struggling to afford essential items, which could lead to reduced spending at retailers. He describes the current retail environment as a "volume mirage," where higher prices do not equate to healthy sales growth.

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The Federal Reserve Bank of New York reports worsening household delinquency rates, indicating increased financial pressure on consumers. Analysts from Wells Fargo express concern that rising energy costs, exacerbated by the Iran war, are adding inflationary risks to an already fragile economic backdrop.

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As the situation in Iran continues to evolve, analysts will closely monitor consumer spending patterns and economic indicators. The potential for further oil price increases could lead to more pronounced impacts on discretionary spending, necessitating ongoing assessment of the U.S. consumer landscape.

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“I think a fundamental difference in our approach is to recognize that retail is dependent on people having money.” — Tom Sebok, Managing Partner, New England Consulting Group

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“Retailers are charging more for less, and you can't build a healthy recovery on selling fewer boxes to fewer people.” — Tom Sebok, Managing Partner, New England Consulting Group

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“While higher oil prices act as a tax to consumers and businesses weakening economic growth, consumer spending is most negatively impacted by more severe downturns in the economy, often from financial crises, that are exacerbated by the oil price spikes,” — Dana Telsey, Analyst, Telsey Advisory Group

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