A second consecutive month of declining employment in March could reignite stagflation fears
U.S. – This week’s economic reports will tell us whether the U.S. economy was already losing momentum before war in the Middle East pushed oil prices and bond yields higher.
We’ll get a fresh read on home prices, retail sales and the labor market – three reports that should help answer the most important question in the economy right now: was growth already slowing before the Iran war sent oil prices and bond yields higher?
Start with home prices.
The latest home price data should confirm what more timely housing indicators have already been showing: housing appreciation was losing momentum even before the war added new pressure. Zillow’s January Housing Market Report showed U.S. home values falling for a sixth consecutive month and nearly flat on a year-over-year basis. That tells us national price growth was already flattening before mortgage rates began moving higher again.
And the direction of the key price drivers still points to further weakness.
House prices are shaped by fundamentals like labor income, household wealth and mortgage rates. All three have become less supportive. The labor market has slowed. Job openings have fallen below the number of job seekers. The stock market was roughly flat in January and is now down year to date. Mortgage rates bottomed in mid-January and then turned higher. The average 30-year fixed mortgage rate rose to 6.43% in the week ending March 20, up 13 basis points in just one week and the highest level since October, as the war pushed the 10-year Treasury yield higher.
That matters for housing affordability. Since the Iran conflict began, the combination of slower income growth and higher mortgage rates has reversed nearly one-third of the full-year improvement in affordability seen in 2025.
Then comes retail sales.
After a weak January, the February retail sales report could show a modest rebound. Financial conditions had improved at the start of February as yields fell sharply, and that likely offered some temporary support to consumers. But investors may not put much weight on that improvement. The backdrop has changed. Since the oil shock tied to the start of the war, yields have moved back up and the squeeze on consumers is back on.
Last but not least, the March jobs report will take center stage.
The labor market was already fragile before the latest geopolitical shock. Now the spike in uncertainty, the rise in oil prices and the jump in yields are all likely to weigh on hiring. Expect a labor market that looks mostly stalled: weak labor demand, little hiring momentum, falling inflation-adjusted wages and a small increase in the unemployment rate.
That said, the unemployment rate may still understate the weakness. A declining labor force can keep the unemployment rate from rising sharply even when hiring is soft. In other words, a weak labor market can still produce a deceptively calm headline.
The oil shock is what raises the stakes.
Federal Reserve researchers found that the roughly $45-per-barrel increase in oil prices in the first half of 2022 pushed headline inflation up by nearly 1 percentage point and reduced GDP growth. More recent research suggests oil shocks also tend to push unemployment higher over time by weakening demand and squeezing real incomes.
That is why this week matters. Disappointing payrolls will reignite stagflation fears.
