Iran talks continue

 By Bruce MacKinnon

Accidents will happen

 By Australian cartoonist Mark David  from Independent Australia

Feeble US recovery due to Trump

This chart shows the average of the PMI and ISM indices for the US (before 2011, it's the ISM alone), broken up into the services and the manufacturing sectors, and the average of the two, shown by the blue line.  (The relationship between the "whole-economy" PMI/ISM index and GDP is shown in the bottom chart, from 2000 to 2026, but I haven't updated the GDP data to include the latest release.)

After previous slowdowns or recessions, the rebound from the low point has been strong.  This time round it has been feeble.  Note how at the beginning of 2025, a strengthening recovery was aborted by Trump's tariffs.  Then, just as the economy started to pick up again, Trump's Iran war has caused a renewed downturn.  Now, so far, it's only one month of slowdown.  But if the Iran war and the oil blockade continue, which seems all too likely, this downtrend will continue.

The 1973 and 1979 oil crises produced deep recessions and strong inflation surges.  It looks as if this will happen again.

click to enlarge

Click to enlarge

For some unknown reason

 By Benjamin Slyngstad

Flower grenade

 By Banksy

Stagflation, episode 2

 These ISM sub-indices give implicit forecasts of the direction of prices and employment.

Thanks to the Iran War, prices (red line) are heading higher, and employment (blue line) lower.  

The shift in just one month (March) is obvious.  The longer this continues, the worse it'll get.

Warning of world recession from PMI/ISM data

When economists first started analysing the business cycle, it was manufacturing* which led the cycle.  The interaction between stocks (inventories), investment, and production meant that this sector of the economy was proportionately more influential on the business cycle than services.  Manufacturing led; services followed.

But services have grown as a percentage of GDP, and even though services don't have an inventory problem (you can't store a haircut or a plane flight), they are in a way more vulnerable to shocks to confidence.  If you fear an impending recession, or a big fall in your income, both of which seem likely as the Iran war drags on, you can cut services immediately.  Don't go out for dinner, don't take a holiday, don't go to shows, have fewer haircuts, and so on.  Of course, you might also postpone buying a car or a house.

What we see in the big 8 (US, UK, Euro zone, China, Japan, Russia, India, Brazil) PMIs shows this split.  Manufacturing is finally recovering from the shock delivered to the system by Trump's tariff stupidities.  Even European manufacturing is now expanding (i.e., in this context, above the 50% "recession line").  Yet, the services PMI has plunged.  And the biggest falls are in the USA and the Euro zone.

If the Iran war is quickly resolved, with irreconcilable differences being papered over for now, it is probable that services could rebound as quickly as they did after Covid.  And a rapid, if short-lived, peace may lead to falling oil prices, which will ensure that Central Banks do not raise interest rates.  But a prolonged conflict will lead to a deep recession and, because inflation will remain high until well into the recession, CBs won't be able to cut rates.  The cut to oil supplies is much bigger than in the 1973 and 1979 oil crises, and those both led to deep recessions and strong inflation surges.

So, whether we get some sort of "peace" or not, is key to whether we enter a deep recession or just a small downward blip.  Trump wants an "off-ramp", of any kind, so my guess is that if Iran agrees to the nuclear deal it agreed to with Obama, and was about to agree to when the US attacked this time, he'll declare a victory and walk away.  But Iran will have demonstrated that it can choke off oil and gas supplies at the drop of a hat.  This is not a recipe for longer-term stability.  So we may see this futile war start and restart over the next while, like embers left over from a bushfire, which means stagflation is horribly likely.

* Actually, in the early 1800s, it was agriculture, because 90% of output and employment was in agriculture.  So what drove the business cycle was the 11-year sunspot cycle.