Red Sea Attacks: Potential Economic Impact for the U.S.

Longer-term, this conflict and others will likely increase onshoring and near-sourcing initiatives. Here's why.

Red Sea Lom742 Adobe Stock 691803109
Red Sea lom742 AdobeStock_691803109

Following several attacks toward Israel in October 2023, Houthi militants have been attacking ships in and near the Red Sea, off the coast of Yemen, targeting both military and trade vessels.

Some businesses and analysts are worried about the potential economic impact.

  • The Red Sea is a key part of a major trade route between Europe, the Middle East, and Asia. Ships avoiding the Red Sea must travel around the southern tip of Africa to get from Europe to Asia, a more expensive and time-consuming route.
  • The Houthi movement has control of a portion of Yemen, a country with shoreline on the southern end of the Red Sea.
  • The Houthis have attacked ships commissioned to carry cars, oil, chemicals, and other goods.
  • The attacked ships have carried the flags of various countries, including Liberia, Norway, Malta, Hong Kong, Singapore, and others.
  • As of press time, the United States and UK launched air strikes against Houthi targets, and the Houthis were still targeting ships.

Economic impact

The attacks are recent enough that, were there a significant economic impact upon the United States, it would not yet be apparent in the data, which lags the present by a month or more. However, as the situation stands today, data from ITR Economics shows a likely near-term impact on the U.S. economy:

  • As the attacks are occurring along a Europe–Middle East–Asia trade route, they are more directly disruptive to U.S. trade partners than to the United States itself.
  • U.S. businesses became well-schooled in dealing with supply chain issues soon after the COVID-19 shutdowns were lifted. Many have turned toward onshoring and near-sourcing, likely lessening the impact – direct or otherwise – associated with the current Red Sea conflict.
  • There was a six-day full blockage of the Suez Canal (and therefore the Red Sea trade route) in March 2021, caused by a container ship that ran aground. This did not measurably exacerbate the trend in the New York Fed’s Global Supply Chain Pressure Index, which was then already rising due to general global supply chain issues in the wake of the COVID-19 shutdowns. Furthermore, there was no measurable impact on U.S. GDP or U.S. industrial production.
  • While a major impact to the U.S. macroeconomy is unlikely (given the situation as it stands today), certain businesses – especially those with international exposure – will likely face some pain.

From an economic perspective, the Red Sea situation, while worthy of close monitoring, especially in the event of further escalation, is another case when waiting on the data before jumping to conclusions will be most prudent. Longer-term, this conflict and others will likely increase onshoring and near-sourcing initiatives.