War, oil shock and market stress raise stagflation fears in US economy

The first 100 hours of the US-Israel conflict with Iran have already burned through $3.7 billion. And the war is still raging. If the situation doesn’t deescalate, which it may not in the near future, American taxpayers could be on the hook for billions more.

The price tag is landing at a precarious moment for the US economy. Financial markets are jittery, employment data is worse than expected, and commodity prices are rising.

Individually, these signals may not indicate a downturn. But together they paint a bleak picture: liquidity stress in private credit funds, cracks in the labour market, and a sharp surge in global oil prices. The result? Growing fears that the world’s No. 1 economy could be drifting toward a dangerous mix economists dread the most: stagflation.

Stagflation, a blend of “stagnation” and “inflation”, describes an economy characterised by high inflation, weak growth and rising unemployment.

Policymakers, economists, and financial markets are closely monitoring these signals as the escalating Middle East war and structural shifts in American economy add more uncertainty to the global outlook. A warning sign has been flashed by the rapidly expanding private credit industry, now valued at roughly $1.8 trillion.

Last week, BlackRock, the world’s largest asset manager, capped withdrawals from a flagship debt fund after a sharp uptick in redemption requests, underscoring rising jitters.

The $26 billion fund faced about $1.2 billion in redemption requests in the latest quarter — roughly 9.3% of its total assets. However, the fund allows withdrawals of only up to 5% per quarter. The result? BlackRock approved payouts of about $620 million, while the remaining redemption requests were pushed to a later date, effectively locking up a sizeable chunk of investor money. This means nearly half of the investors seeking to exit were denied access to their money — at least for now. Such restrictions may not be unprecedented in private markets, but the scale and timing of the move have raised eyebrows, especially given BlackRock’s dominant position in global finance.

A similar private credit fund managed by Blackstone faced redemption requests equal to about 7.9% of its assets, forcing the firm to raise withdrawal limits and inject about $400 million of its own capital. Meanwhile, Blue Owl reportedly halted redemptions altogether, issuing IOU-style commitments to investors.

Jitters quickly rippled through markets. Shares of BlackRock slid about 5% in a single trading session, while major alternative asset managers, including KKR, Carlyle Group, Apollo Global Management, Ares Management, Blue Owl Capital and TPG, also fell roughly 5% to 6%.

Add the worrying US labour market data. Nonfarm payrolls fell by 92,000 jobs in February, sharply missing expectations of a 60,000 gain, according to the US Department of Labor. The unemployment rate edged up to 4.4% from 4.3% in January, while revisions to earlier data painted an even weaker picture.

January’s job growth was revised down to 126,000 from 130,000, and December’s figures were dramatically adjusted — from a 48,000 gain to a loss of 17,000 jobs. Several key sectors — including healthcare, leisure and hospitality, construction, and manufacturing — shed workers during February.

The hiring rate has also slipped to 3.2%, one of the lowest outside the pandemic era. Economists describe this environment as a “low-hire, low-fire” labour market.

This dynamic can temporarily hide economic weakness. But over time it gradually erodes job growth, leaving the labour market vulnerable to sharper deterioration later.

Add a sharp surge in global oil prices. The US/Israel military campaign against Iran has sent oil prices skyrocketing, reigniting inflation fears just as economic momentum appears to be slowing.

Crude markets reacted violently in early March. On the New York Mercantile Exchange, West Texas Intermediate (WTI) crude for April delivery jumped $9.89 to $90.90 per barrel, a one-day gain of more than 12%. Global benchmark Brent crude climbed $7.28 to $92.69.

Over the week, front-month WTI futures surged more than 35%, marking the largest weekly percentage gain since crude futures trading began in 1983. The prices further shot past $115 per barrel before easing below $100.

Saudi Aramco, the world’s largest oil exporter, warned that the Iran war could have “catastrophic consequences” for global oil markets if shipping through the Strait of Hormuz remains disrupted. The waterway normally carries about 20% of the world’s daily oil supply. Tehran has warned that it would not allow “one litre of oil” to leave the Middle East if US/Israeli attacks continue.

This unsettling mix raises the spectre of stagflation.

For the Federal Reserve System, the situation presents a complex challenge. The central bank must balance its dual mandate: maintaining price stability while supporting maximum employment. But skyrocketing oil prices could push inflation higher precisely when the labour market is starting to soften.

Mary Daly, president of the Federal Reserve Bank of San Francisco, has already warned that market expectations of labour-market resilience may be overly optimistic.

Investment strategists are beginning to echo those concerns. Alice Osenbaugh, head of investment strategy at JPMorgan Wealth Management, recently described the mix of rising oil prices, trade uncertainty and a fragile labour market as a “difficult backdrop” for policymakers. Meanwhile, Jan Hatzius, chief economist at Goldman Sachs, said the latest employment data could mark the early stages of a stagflationary environment.

Growth forecasts are already being revised. The Federal Reserve Bank of Atlanta’s GDPNow model recently cut its estimate for first-quarter US growth to 2.1%, down sharply from 3.2% just one day earlier.

The downgrade suggests economic momentum may be fading faster than expected.

Another emerging feature of the US economy is its growing dependence on AI-related investment. Much of the recent cyclical growth appears to be concentrated in a narrow set of sectors linked to AI infrastructure, particularly data-centre construction and advanced computing investments.

When volatile components such as government spending, inventories and trade are stripped out of GDP, the core economy appears relatively stable. But a deeper breakdown reveals a widening divergence.

Traditional cyclical sectors — durable goods consumption, housing and equipment investment — have slowed considerably. Conversely, AI-driven investment is on an upward trajectory.

The trend suggests the physical economy may be weakening even as technology-driven spending masks the slowdown.

Geopolitics could add another layer of uncertainty. The ongoing military confrontation between the US/Israel and Iran is raising questions about global production costs, supply chains and energy security. Some sovereign wealth funds have reportedly become more cautious about US dollar-denominated assets, although the scale of any shift remains unclear.

So far, financial markets have shown limited concern about a prolonged conflict, possibly reflecting investor expectations that geopolitical shocks eventually fade. But if oil price spike doesn’t ease and the war rages on, the cumulative effects on inflation, corporate earnings, and asset valuations could intensify.

Taken together, the signals point to mounting economic pressure. On one side, corporate earnings and employment growth are weakening, particularly outside the AI-driven technology sector. On the other, financial markets may be beginning to reassess the high valuations that have defined US equities in recent years. This combination could create a more difficult environment for investors.

For now, economists caution that weak jobs report or a temporary oil spike doesn’t automatically signal a recession. But the convergence of several warning signs — liquidity stress in private credit, labour-market softness, and a major commodity shock — has raised the risk of a more turbulent phase for the US economy.

Whether the country ultimately slides into stagflation or manages a softer adjustment may depend on energy prices, geopolitical developments and how the Federal Reserve responds in the months ahead.