The economy is in an industrial recession and higher oil prices could spark a full downturn, Wall Street economist says

An offshore infrastructure construction manager walks near a large steel cylinder called a monopile at a wind turbine manufacturing facility.

The US economy is already experiencing an industrial recession — and it could snowball into a full-fledged downturn if oil prices continue to surge, according to Piper Sandler economist Jake Oubina.

Oubina, a managing director and senior economist at the investment bank, pointed to the continued slowdown in the manufacturing sector, with activity contracting in September for a sixth straight month. It also marks the 22nd monthly contraction over the last 23 months, according to the latest report from the Institute of Supply Management.

The slowdown is likely to drag on, Oubina predicted.

“The only things that are up are things that are financed by chips, [the Inflation Reduction Act], all the high-tech stuff, fueling data centers, semiconductors, etc. That’s been up. But in general, the economy’s showing an industrial recession,” Oubina said in an interview with Fox Business on Tuesday.

The economy could slip into a broader recession if there’s a spike in oil and energy prices, Oubina added. That’s in line with what other economists have warned, with some pointing to the oil price shock that triggered a downturn in the 1970s.

Brent crude, the international benchmark, soared this week after Iran launched a missile attack on Israel, sparking fear of supply disruptions.

“I think of the biggest risk of that, right, a retaliation by Israel that actually targets oil production facilities,” he said of the Tuesday attack. “Oil prices spiking, energy prices spiking in the past, have been enough to tip the economy from a slowing into a recession. So I think that’s what we have to worry about.”

Other economists have flagged the slowdown in manufacturing and a potential rise in oil prices as risks to a soft landing for the US economy. Overall economic growth, however, remains strong. GDP is estimated to have grown 2.5% last quarter, according to the latest projection from the Atlanta Fed. That follows nearly 3% growth in the second quarter.

Meanwhile, the services sector of the economy remains “healthy,” despite “subdued” manufacturing activity, Bank of America strategists wrote in a Tuesday note.