Iran reopened the Strait of Hormuz this week (only to close it again the next day), crude oil futures dropped toward $80 a barrel and the S&P 500 touched a record high. The data, however, told a different story — one of an economy still absorbing the hit from a war whose effects will linger long after the last ceasefire provision is signed.

Executive Summary

• Iran declared the Strait of Hormuz fully open to commercial traffic then reimposed “strict control” the next day, crude oil futures fell near $80 per barrel and the S&P 500 reached an all-time high. The Geopolitical Risk Index (GRI) jumped two standard deviations in the first quarter, however, and the drag on business investment and hiring will likely peak two to three quarters from now.
• The Producer Price Index (PPI) climbed to 4.0% year-over-year, its highest reading since February 2023, even as core producer prices rose a mere 0.1% month-over-month. Artificial intelligence (AI) demand has driven electronics components prices 19% higher year-over-year, fueled by a shortage of Dynamic Random-Access Memory (DRAM) semiconductor chips.
• Oxford Economics Personal Consumption Expenditures (PCE) tracking nowcast points to headline inflation of 3.4% year-over-year, the hottest reading since September 2023.
• The National Federation of Independent Business (NFIB) optimism index tumbled to its lowest level since “liberation day,” and plans to raise selling prices dropped to their lowest point since mid-2024.
• The Federal Reserve’s Beige Book showed the economy holding steady, with the in-house Beige Book Activity Index (BBAI) improving to 0.48, well clear of recession territory, even as businesses cited the war as the dominant source of uncertainty.
• The National Association of Home Builders (NAHB) Housing Market Index fell to 34, its lowest since September, while existing home sales slipped 3.6% to a seasonally adjusted annual rate (SAAR) of 3.98 million.
• Industrial production fell 0.5%, driven by declines in mining and utilities rather than manufacturing. Initial jobless claims dropped to 207,000, and the labor market shows no sign of deterioration from the war.

The Ceasefire Turns Real — But the Damage Clock Is Ticking
The two-week ceasefire between the United States and Iran expires on April 22, but momentum toward a lasting agreement accelerated this week. President Donald Trump announced a separate ceasefire between Israel and Lebanon, directly linked to the broader peace framework and Iran declared the Strait of Hormuz fully open to commercial traffic but then did an about face on Saturday morning reimposing “strict control” of the waterway.

Markets responded emphatically: crude oil futures dropped near $80 per barrel and the S&P 500 reached an all-time high. The retreat in energy prices and the recovery in equities remove two of the biggest near-term drags on the outlook, the real income squeeze from gasoline and the negative wealth effect on upper-income spending that a deeper selloff would have triggered. But the damage from elevated geopolitical risk will not heal on the ceasefire’s timeline. Federal Reserve research shows the peak drag from a geopolitical shock on business investment (roughly 1.2%) and private weekly hours worked (approximately 0.6%) arrives two to three quarters after the event, meaning the worst of the economic impact from the first quarter’s volatility still lies ahead.

• Key Takeaway: The ceasefire rewrites the risk distribution, not the damage function. Businesses that froze hiring and investment plans during the conflict will not unfreeze them the moment diplomats shake hands.

The Inflation Pipeline — From Producer to Consumer
The March PPI climbed 0.5% month-over-month, lifting the annual rate to 4.0%, its highest since February 2023. Energy prices surged 8.5% and diesel fuel costs spiking an extraordinary 42%. Core producer prices told a different story, rising a mere 0.1% as the annual rate actually ticked down to 3.7% from 3.8%. The stubborn outlier remains electronics: AI demand has created a shortage of DRAM semiconductor chips, driving components prices 19% higher year-over-year and damage to Middle Eastern natural gas and helium production facilities threatens to tighten supply further.

Import prices showed similar broadening, rising 2.1% year-over-year, the strongest gain since December 2024, with nonfuel imports driving the bulk of the monthly increase and signs emerging that foreign exporters have stopped cutting prices to absorb tariff impacts. With both the Consumer Price Index (CPI) and PPI data now in hand, our PCE tracking nowcast points to headline inflation of 3.4% year-over-year, the hottest since September 2023, with headline PCE expected to average 3.7% in the second quarter before easing to 3.0% by year-end.

• Key Takeaway: The energy shock dominates the headlines, but core inflation and the producer pricing pipeline are not flashing the kind of alarm that would force the Federal Reserve to choose between its mandates.

Small Business Under Siege, Big Picture Holding
The NFIB Small Business Optimism Index fell to its lowest reading since “liberation day” in April 2025, with broad-based declines across capital expenditure plans, inventory intentions and the share of firms reporting positive earnings. Uncertainty surged to its highest point since September as owners struggled to gauge the future cost of energy and the war’s knock-on effects on demand. These firms absorbed the blow through thinner margins rather than higher prices. Plans to raise selling prices actually declined, dropping to their lowest level since mid-2024.

The Federal Reserve’s Beige Book painted a steadier picture at the macro level: the BBAI improved to 0.48 from 0.27, with eight of twelve Federal Reserve districts (67%) reporting growth, a reading well clear of recessionary territory. Yet beneath that surface stability, firms described a “no-hire, no-fire” labor market where AI-driven productivity gains are reducing the need for new headcount and input costs continue to outrun selling prices, squeezing margins further.

• Key Takeaway: Small businesses are the canary for second-round inflation effects, and their decision to eat the cost rather than pass it on supports the view that core price pressures will remain contained, but their margins cannot absorb this indefinitely.

Housing — Frozen by Rates, Haunted by Inventory
The NAHB Housing Market Index dropped four points to 34 in April, below consensus, with the sharpest decline coming in the component measuring expectations for home sales six months from now. Builders cited declining consumer confidence, rising mortgage rates and higher material costs tied to oil prices as the primary culprits, and they pulled back on incentives to protect their margins. The share of homebuilders offering any form of buyer incentive fell to 60% from 64% in March.

The overhang of completed but unsold homes, which sat at 2009 levels in January, must shrink before any meaningful pickup in starts can materialize. On the resale side, existing home sales fell 3.6% in March to a SAAR of 3.98 million, with supply rising to 1.36 million units. This equates to 4.1 months at the current selling pace though inventory growth of 2.5% year-over-year marked the smallest annual increase since April 2022. Price growth continues to diverge sharply by region: the Northeast and Midwest posted gains, the South held roughly flat, and the West remained in negative territory for several consecutive months.

• Key Takeaway: Housing will not lead the recovery, it will follow, and only after mortgage rates give builders and buyers a reason to come off the sidelines, which requires oil prices to fall further and the Federal Reserve to act.

The Factory Floor and the Labor Market — Patience Required
Industrial production fell 0.5% in March, the first reading to cover the war period, but the decline concentrated in mining and utilities rather than manufacturing, where output barely dipped and February’s estimate earned an upward revision. Motor vehicles and parts stood out as a drag and remain one of the segments most vulnerable to an oil price shock, since surging gasoline prices lead consumers to defer big-ticket purchases and automakers to cut assemblies.

The broader risk: the Global Reporting Initiative (GRI) has surged four standard deviations since the war began, which historically translates to roughly a 1% drag on the level of industrial production. The labor market, by contrast, has not flinched. Initial claims fell 11,000 to 207,000 in the week ended April 11, with the four-week moving average steady at 209,750 and claims running 3.2% below year-ago levels. Continued claims rose to 1.818 million, but the trend remains downward, with the four-week moving average at its lowest point since June 2024.

• Key Takeaway: The labor market’s calm is real but borrowed. Oil shocks hit employment with a lag, and the geopolitical risk drag on investment and hiring has not yet peaked.

Final Thoughts
The narrative shifted decisively this week. A month ago, markets priced in an open-ended energy war with no clear exit. By last week’s end, Iran has reopened the Strait (only to close it again on Saturday), oil dropped to $80 and the S&P 500 has printed a record high. That is a remarkable reprieve, but it is not an all-clear.

The Federal Open Market Committee (FOMC) faces a delicate balancing act: inflation runs hot on the headline but cool at the core, and the labor market remains stable but increasingly exposed to the lagged effects of a shock whose full economic damage has not yet materialized. Markets have completely priced out a Federal Reserve rate cut this year. President Trump’s threat this week to remove Federal Reserve Chair Jerome Powell drew headlines, but the ongoing Supreme Court case over the dismissal of Governor Lisa Cook carries greater weight. A ruling against the White House would meaningfully limit its ability to reshape the board.

The path from here depends less on the ceasefire text and more on how quickly confidence recovers, among consumers, small businesses and corporate investment committees. Potential gross domestic product (GDP) growth remains north of 2% over the coming decade, almost all of it powered by productivity, and this is anything but stagflation. If history is any guide, that recovery will be measured in quarters, not weeks. The economy entered 2026 with genuine momentum, and nothing in this week’s data says that momentum has broken. But the war bent it, and the scars will shape the trajectory long after the headlines move on.

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