Democrats fear economic fallout from Red Sea could hurt them in November

The intensifying Red Sea conflict is threatening to ripple across the U.S. economy at the most inopportune time for Democrats and President Joe Biden — potentially nudging inflation back up just ahead of this fall’s election.

The ongoing attacks by Iranian-backed Houthi militants on commercial ships in the Red Sea are disrupting one of the world’s major shipping routes. And while Europe, Africa and the Middle East are the most directly affected by the conflict’s ensuing trade disruptions, the growing global turmoil poses significant risks for the U.S. Over the longer term, that could drive up prices on consumer goods, including groceries, denting White House efforts to tamp down inflation and sell Americans on the president’s “Bidenomics” message.

Any economic fallout would also put pressure on a string of down-ballot Democrats in tough races, who, like Biden, have until recently faced deeply pessimistic voter outlooks on the economy.

Democrat Jon Tester of Montana, one of the most vulnerable incumbent senators facing reelection, said in an interview he had concerns “about what it could do for costs” for American consumers, adding, “it wouldn't be good.”

Inside the White House, Biden’s top economic advisers have closely monitored the shipping disruptions in recent weeks for signs that it could hurt the broader U.S. economy. White House officials worry the ongoing clashes and resulting economic damage “could spiral quickly,” especially if the conflict surrounding the Israel-Hamas war widens, according to one White House official, who was granted anonymity to discuss internal conversations. The White House has cited those concerns to justify recent U.S. military strikes against Houthi sites in Yemen.

Already, the Houthi attacks have cut off many ships’ access to the Suez Canal, which connects the Red Sea to the Mediterranean and accounts for up to 15 percent of global trade. That’s driven up shipping costs — the average global price to ship a 40-foot container has more than doubled in the past month,according to data from the London-based Drewry Shipping Consultants. And the World Trade Organization said last week that wheat shipments via the Suez Canal fell by nearly 40 percent during the first half of January, as companies opted to divert their fleets away from the Red Sea toward the Cape of Good Hope around South Africa.

Current and former U.S. officials and global trade watchers note the direct economic impacts to the U.S. are still fairly limited. But even small disruptions can drive up already volatile energy prices that filter into fuel and food prices for months to come.

The White House’s economic and national security teams are paying particular attention to volatility in oil prices, driven in part by anxiety over the potential for a wider war in the Middle East, according to three people familiar with the matter, who were granted anonymity to discuss internal conversations. Biden officials are wary that could eventually translate into a politically damaging spike in prices at the pump and eventually the grocery store.

“If energy prices go up and remain high, you’d see food inflation persisting,” said Joe Glauber, a former chief economist at the U.S. Department of Agriculture under Barack Obama who is now a senior research fellow at the International Food Policy Research Institute.

Glauber also said potential disruptions in the global flow of fertilizer, a key component of food production, could compound pressure on U.S. farmers and consumers at the grocery store, especially if the Red Sea conflict expands.

The economic fallout from the conflict isn’t likely to trigger the same dramatic rise in prices that Americans experienced during the height of the pandemic, but it could stall recent gains against inflation that have cheered Democrats. Glauber noted that it's taken a significant period of time for consumer prices to moderate since Covid-19 hit in 2020.

American consumer sentiment jumped 13 percent in January, according to a recent survey from the University of Michigan. While food inflation is generally easing, White House officials privately worry food prices are still too high, dragging down Americans’ view of the otherwise improving economy.

“Any U.S. economic impact is likely to be sentiment driven,” said James Knightley, ING’s chief international economist, based in New York. But the American economy could be still influenced by a downturn in Europe, Knightley said, adding that higher gas prices would be the real pain point.

The administration has so far downplayed concerns that a running conflict with the Houthi militia will take an outsized toll on an improving U.S. economy, which remains key to Biden’s case for reelection.

Following a series of retaliatory strikes on Houthi sites last week, National Economic Council Director Lael Brainard said there had been little evidence that the shipping disruptions to date were having a measurable effect on the American economy.

“Some shippers are taking alternate routes, that is leading to longer shipping times. But so far that really hasn’t had an effect on the U.S. economy,” Brainard said. “Those shipping lanes are more salient for other parts of the world.”

Companies tracking shipping costs, however, warn the fallout is already starting to reach the U.S., and will only grow as the conflict continues.

“It’s a huge disruption,” said Ryan Petersen, CEO of freight logistics technology firm Flexport, which tracks ocean shipping. “Eventually that has to flow through to the price we pay for goods.”

Petersen added that the disruptions initially spiked prices largely for shipping to Europe, but that in recent weeks the cost of getting products to the U.S. began to shoot up significantly as well. Shipping prices from Asia to the U.S.’s West Coast are up 74 percent since mid-December, according to data earlier this month from Freightos, a freight shipping logistics company.

“That chaos costs a lot of money,” Petersen said.

U.S. officials are prepared for the conflict, now entering its third month, to continue for some time. Recent intelligence gathered by the U.S. and other Western countries indicates the Yemen-based Houthis are seeking more weapons from Iran, adding to concerns that the conflict will widen. That’s driven up pressure on the president to respond more forcefully.

In recent days, the U.S. military, in collaboration with the U.K., has stepped up its strikes againstHouthi facilities across the militant group’s home base of Yemen. Biden’s national security adviser Jake Sullivan recently noted it’s likely that, in the short-term, the U.S. is on “a path of escalation that we have to manage.”

“I think that's exactly why the military has done what they've done,” said Tester, referring to the need to keep the global trade fallout and larger military conflict from spreading.

And, many Hill Democrats are urging Biden to keep up the pressure, even as some in their party warn him against carrying out new strikes in the region.

Sen. Chris Coons (D-Del.), a Biden ally, said Biden’s decision to order the initial strikes against Houthi sites earlier this month was key for both a military response and for global trade implications, adding that the president has been “relentlessly engaged in working to deter Iranian aggression in the region."

The uncertainty, however, continues to worry many Democrats. “There's always concern when there is conflict or disagreement in any part of the world that are commerce corridors, that it could lead to more pressure on the American people as well,” Sen. Ben Ray Luján (D-N.M.) said.

There are “endless outcomes that could result from more and more intense conflict” in the region, Luján added.