Oil prices have risen sharply since February, creating a renewed headwind for real income growth and raising downside risks to consumer spending at a time when the labor market is already soft. While higher energy costs complicate the outlook, we do not believe current conditions are sufficient on their own to derail the expansion.
Employment growth has stalled over the past year and real personal income excluding transfers is already under pressure from slowing wage growth and persistent inflation. A sustained increase in gasoline prices would mechanically push inflation higher in the near term and could lead to outright declines in real income over the next few months.
That said, the sensitivity of aggregate consumer spending to energy shocks has diminished over time. Services account for a larger share of total consumption, demographics are cushioning aggregate demand and fiscal support is providing an offset to weaker labor income.
Our simulations suggest that a moderate oil price shock would slow, but not reverse, real PCE growth. It would take a larger and more persistent increase in oil prices to generate the kind of broad based spending contraction typically associated with recession.
We have only incrementally changed our baseline growth forecast at this time. However, the balance of risks has shifted to the downside, particularly if higher energy prices prove persistent or spill over into broader financial conditions.
While recession risks have risen, we continue to see enough sources of support to growth for the expansion to continue over the next year.
Despite recent market volatility, our U.S. rates outlook is unchanged: still two 25 bps cuts this year and a 4.25% year-end 10‑year Treasury yield, with risks two-sided (later/less easing vs. deeper cuts only if recession tail risks materialize).
