America’s frozen jobs market could stay on ice due to Iran war

By Alicia Wallace, CNN

(CNN) — US job growth was lackluster last year, but signs of stabilization, if not a rebound, were starting to emerge.

Now, a war thousands of miles away not only interrupts that potential progress, but also threatens to knock the labor market further off course.

It’s been four weeks since the US and Israel launched strikes against Iran. The economic ripple effects of the escalating and deadly Middle East conflict have been swift: A choked-off critical shipping passageway has caused oil prices to shoot higher, hampered the supply chain and pushed up the cost of gasoline. Inflation fears have heightened, as has uncertainty. That’s a dynamic that strangled the labor market.

“If the Strait of Hormuz remains closed and the oil price stays above $100 through April, then I think it’s a game-changer,” Heather Long, chief economist said. “Then you’re talking about a very different economy, then you’re talking about layoffs re-entering the picture.”

The listless, anemic, “low-hire, low-fire” labor market dynamic is expected to persist … for now.

“Uncertainty is delaying, not canceling, hiring plans,” Gregory Daco, chief economist at EY-Parthenon, told CNN last week.

Daco currently expects a “jobless” expansion with employment gains of around 20,000 per month in the first half of the year and unemployment (currently at 4.4%) drifting toward 4.7% by the end of the year.

“With recession odds around 40%, the risk is that a prolonged pause in hiring eventually turns into more visible softening,” he wrote. “For now, it’s still a cooling, not a cracking. But if uncertainty were to re-escalate, those cracks could emerge by late-spring.”

‘Stable but stagnant’

Already, last year was one of the weakest for the US labor market in decades, outside of recession years.

The economy added just 116,000 jobs in 2025, the latest official estimates show. For comparison’s sake, the economy added roughly 121,000 jobs per month in 2024, a rate that was in line with historical averages.

There was optimism, however, that the employment gains wouldn’t be as meager this year.

Inflation was projected to ease, a trio of late-2025 interest rate cuts were permeating through the broader economy and the new tax law was expected to juice consumer spending and business investment.

Plus, uncertainty – the biggest domino of them all – had the potential to recede as companies gained greater clarity on the economy, borrowing costs, tariffs and other federal policies, technological advancements, and geopolitical developments.

The new conflict in the Middle East has instead amplified that uncertainty.

“We haven’t seen anything in our data yet that would make us think that the job market is either picking up dramatically or deteriorating dramatically in the US,” Laura Ullrich, director of economic research at the Indeed Hiring Lab, said in an interview. “Things still look pretty stable but stagnant.”

Consumers, a key economic engine, are facing higher costs

Oil prices have risen sharply since the start of the war and are up by about $30 a barrel (and at one point were as much as $50 a barrel). Each $10 increment of those increases carries significant economic consequences from dragging down GDP growth to pushing up inflation, economists say.

Some effects have been immediate for American consumers. US average gas prices are up $1 to $3.98 per gallon from their pre-war averages, AAA data shows. The higher energy costs (gas, heating, utilities) could negatively hit annual household income by more than $1,350.

The higher costs aren’t expected to end there. The OECD projected Thursday that the US inflation rate could rise to 4.2% this year (it was 2.4% in February, as measured by the Consumer Price Index).

Economists are closely watching how well the American consumer holds up when faced by not only higher gas prices but also higher oil prices that could permeate the cost of goods and services throughout the economy.

Consumer spending accounts for two-thirds of economic activity, so if that drops off, that could spell trouble for the US labor market.

Navy Federal Credit Union’s data on credit and debit card spending shows more dollars going toward energy and gas, but consumers also appear to be “front-loading” some purchases – much like they did last year in anticipation of steep tariffs, Long said.

“People can anticipate that air fares are going up and vacation plans for the summer might be a little more expensive, and so they’re trying to book it now,” she said.

Helping some consumers is a slightly bigger financial cushion, she said, noting tax refunds that have been, on average, 10% higher than the previous year. The continued stream of spending could keep potential layoffs at bay, but that dynamic can’t go on indefinitely, Long said.

“But right now, the consumers are hanging in there,” she added.

Batches of new labor market data – including the latest on turnover, private-sector hiring, layoff announcements, and the crucial monthly jobs report – are due out this week.

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