26 May Expectations for 2026’s “Wartime” Economy

By Michael McAdams, President, Pasadena Private Lending

We are asked a lot lately about what to expect from the economy in this time of Mideast war. But it isn’t clear if we are in a wartime economy or just in an economy impacted by wartime influences, all on the heels of nearly five years of post-Covid recovery inflation. The additional economic crosswinds and data anomalies make comparisons and extrapolations even harder, but there are both parallels and differences as well as unique issues to consider as we sort out what is in store for the rest of 2026.

Let’s start with a look at data midstream into a bona-fide wartime economy and what we see today. Yes, we are only two months into an undeclared conflict, but there are some elements worthy of comparison. Note that economic data in 1944 was less comparable and that fall 2025-spring 2026 data suffered from its own collection issues.

Observations from the chart:

1. Pre-WWII inflation was low, and wartime economic controls contained inflation through rationing and resource allocation into highest priority uses. It was post-WWII that consumer demand kicked in when prices rose;
2. Wartime employment put people to work, and today, despite the largest Department of Defense budget in history, military spending is just ramping up and a small part of the overall economy;
3. While significant tariffs are behind the US, global trade barriers still exist. While world trade is broader today, similar constraints existed then and now for security-related products;
4. Overall growth was, not surprisingly, large in 1944 propelled significantly by the war effort as a proportion of the overall economy.

Again, our defense industry, even pushed along by a “wartime” budget allocation, hasn’t moved the economy significantly as yet. All-in-all, it seems a mixed bag of conclusions and no decisive indictors for what to expect for the end of 2026. So let’s dig deeper.

Employment

The US economy added 115,000 jobs in April, a sign the labor market is holding up despite the impacts of inflation and general uncertainty brought on by the war. Of note is that pre-release expectations centered on only 55,000 jobs being created. Clearly, we haven’t converted economic production from “butter to guns” (or added women to the workforce to assemble aircraft, as in WWII). That is, the economy is pushing along on its own despite other issues including tech layoffs due to AI-conversions.

Oil, Consumer Price Inflation, Interest Rates

As to inflation caused by energy price increases…not just from the disruption of supply chains in the Gulf but the destruction of petroleum capacity… the Bureau of Labor Statistics recently announced that the CPI – a broad measure of everyday goods like gasoline, groceries and rent – rose 0.6% from a month ago and is 3.8% higher than last year, the highest level for a year.

But let’s look at how inflation and oil prices tend to move, as oil prices may not be done rising as global stocks are depleted by further Iran conflicts.

In the first St Louis FED research graph below, a Global Food Price Index is tracked alongside Brent crude oil prices from 1998 to the present. The two series exhibit a notable degree of “co-movement.” Both surged during the global commodity boom of the mid-2000s, peaked sharply around 2008, collapsed during the global financial crisis, recovered through the early 2010s, and spiked again in 2022.

Such co-movement is logical as oil is an input at multiple stages of agricultural production and distribution, and as energy costs are passed through the supply chain, food prices respond accordingly. But other factors are at work. Broad macroeconomic conditions (recessions, recoveries, geopolitical shocks) can also impact prices.

That is, shifts in global demand and geopolitical disruptions affect both output and energy consumption, where a common shock can move both oil and food prices. This is shown in this second chart.

Taken together, these two graphs suggest that large and sustained oil price movements have historically coincided with changes in both food prices AND broader consumer inflation. The 2022 episode is a clear example: Brent crude surged above $120 per barrel following Russia’s invasion of Ukraine, the Global Food Price Index reached its highest level in the sample, and world inflation rose sharply.*

While these historical patterns do not imply a precise causal relationship, they suggest that developments in oil markets are often an important signal for broader price pressures that last through at least several global crop cycles.

So, the Federal Reserve will need to consider the reality of the time it will take to repair and stabilize oil production AND see food stocks normalize over 1-2 crop seasons as it considers its critical decision-making in balancing inflation and employment. Even with a new hand-picked Fed Chairman, the data is the data and inflation numbers are strong as are job numbers. Few economists today see rate cuts coming soon. The implications for capital markets and real estate need to also be considered.

Oil vs. Itself

At first glance, the recent March 2026 oil price spike can be seen beyond historic norms with market reactions proportionate to short-term supply restrictions.

On second look, in comparison to price moves over a 10-year period, the current spike isn’t quite so shocking and possibly better explains why markets and economic activity haven’t been as dramatically impacted. In short, “we have been there before” and some firms have undoubtedly dealt with disruptions before or at least feel less completely surprised and incapable of dealing with the price spike.

GDP Trends

Recent data for Q1 2026 indicates a 2.0% growth rate for the US economy with expectations for a slight cooling toward 1.7-1.8% for the rest of the year (of course, still subject to many externalities and uncertainties). If we are expecting a boost from war-related defense spending (that is, the spending of the largest DoD budget in history passed in February), we might see a bump in GDP in later quarters. But none are currently predicted as the economy is just too broad for even a trillion dollars being spent by the government to move the GDP needle much (also considering with possibilities of downstream impacts from petroleum availability across some chemical and plastics sectors later in the year.) On an inflation adjusted basis, real growth prospects get less buoyant.

We should note that in the past, after large wartime economic government spending boosts, particularly after WWII, there was an economic let down as the government stopped spending before the private sector caught up again. That is the so called “phoenix factor” where the economy slowed for a year or so then rose from the ashes once again.

Researchers Organski and Kugler’s so-called “phoenix factor” has been demonstrated in several countries, but, per the above chart, the result is that the economy could have followed its growth trend without this episode of economic growth just as well. Thus, wartime spending tends to have no lasting impact and only adds to national deficits. So, we have nothing to look forward to economically post hostilities.

Households and the Tax Effect

An Edward Jones analyst said recently that “American households continue to feel the brunt of surging energy costs, adding to the deluge of inflation they have weathered since the pandemic. But, the good news is that the economy looks resilient to this price shock so far with many consumers benefitting from tax refunds this year. Additionally, hiring has picked up from near stagnant rates in 2025 and businesses are generating robust profit growth.”

War Time or Just Tough Times?

It may be too early to call it a wartime economy, but looking at past examples may still be instructive. A diverse economy’s job picture is holding up. Inflation is not abating, but consumers may be more used to high prices than their complaints (and possible fall voting patterns) may indicate. The Fed is unlikely to be pushed into cuts given clear inflationary pressures with still good job data. And to date, businesses evidently are passing on costs or they wouldn’t be hiring (or would be laying off more workers.) So, things could be worse. Or, maybe we are just getting better at dealing with uncertain times.

*The FRED data article did not include the bottoms of both graphs. To do so, for the first graph, search FRED for “Global price of Food Index” and select the IMF series. Click “Edit Graph” and then “Add Line,” and then search for “Crude Oil Prices: Brent – Europe.” Place the second series on the right axis under the “Format” tab. Set the start date to 1998-01-01. For the second graph, search FRED for and select “Crude Oil Prices: Brent – Europe” and set units to “Percent Change from Year Ago.” Click “Add Line” and search for “Inflation, consumer prices for the world” (the World Bank series), placing it on the right axis. Set the start date to 1988-01-01.