Economic Update Spring

Real GDP increased at an annual rate of 0.5% in 4Q 2025 (U.S. Bureau of Economic Analysis). Consumer spending and investment contributed to the increase, while the government shutdown reduced government spending and weighed on growth. Markets largely looked through the weak, backward-looking print, viewing it as a political disruption rather than a deterioration in underlying demand. The economy remains resilient and in expansion, having absorbed shocks such as the longest government shutdown. The prior quarter posted a robust 4.4% growth rate. As of April 9, the GDPNow model estimates 1Q 2026 real GDP growth of 1.3%. Recession risk has risen, but that is not my base case.

The U.S. economy is not recession-proof, but its underlying engines remain strong enough to keep expanding despite headwinds. Resilient consumer demand, a more flexible Fed, solid corporate profitability, and productivity gains make this cycle different from many stagflation or credit-driven downturns of the past.

Several structural strengths are helping support the expansion:
• A large, diversified services sector
• Stronger household balance sheets post-pandemic
• AI-driven productivity gains
• Corporate margins that can act as shock absorbers
• A Fed that is cautious, not aggressive
• Consumers who continue spending despite uncertainty

In past cycles, rising unemployment alongside high inflation often forced the Fed to tighten aggressively. Today, inflation is elevated but not accelerating at the same pace, giving policymakers more flexibility to avoid overtightening.

The longer oil prices remain elevated, the more likely they are to pressure the economic data. So far, however, there has been little evidence that the Iran war has pushed activity meaningfully below expectations or that a recession is imminent. The Bespoke Economic Indicator Diffusion Index suggests economic activity is not breaking down.

Historically, a sustained Brent oil price above $100 for three months has not reliably pushed the U.S. economy into recession. Some analysis suggest recession risk tends to rise at much higher and longer-lasting price levels— in the $135–$150 range and only if maintained for several months (Benzinga/BlackRock). There remains a risk that Brent rises toward $135 if the conflict escalates, but recent ceasefire discussions raise the question of whether prices have already peaked. In prior shocks, the most acute price spike often occurred about a month after the initial catalyst (e.g., the Ukraine invasion).

Current gasoline prices are at the highest level since May 2024, but still about 30% below the five-year peak from June 2022. Higher gas prices tend to hurt lower-income households the most, which represent a smaller share of aggregate consumption. The U.S. economy is also far less energy-intensive than in prior decades. Fidelity’s macro research suggests households typically reach recession-level stress when oil prices are roughly $135–$145 and remain there for 3–4 months, when energy spending exceeds the critical 5% of household income threshold. Notably, Brent spiked to $139 in March 2022 and the U.S. did not enter recession in 2022–2023 despite widespread concern.

Brent futures markets are forecasting lower prices later this year. Near-term prices remain higher than longer-dated contracts, which can signal a short-term disruption rather than a sustained imbalance. The current curve implies prices falling below $100. One reason is that the primary driver of the spike has been the closure of the Strait of Hormuz. A ceasefire that allows shipping to resume could gradually ease supply constraints, though normalization may take time. Citrini research expects traffic to reach roughly 50% of pre-conflict levels within 4–6 weeks.

High oil prices can lift inflation, suppress spending, and pressure energy-intensive sectors. However, the U.S. economy is more resilient today due to:
• Higher domestic oil production
• More efficient energy use
• A larger services share of GDP

Even so, inflation pressure can build the longer an oil shock persists. The impact extends beyond the gas pump to air travel, shipping, fertilizer, and more. President Donald Trump issued a 60-day waiver of the Jones Act, which normally requires goods transported between U.S. ports to be carried on U.S. vessels. The waiver is intended to help resources such as oil, natural gas, and fertilizer flow more freely to U.S. ports for the next sixty days.

China, Europe, India, and Japan face greater disruption risk than the U.S., which is comparatively energy self-sufficient. Goldman Sachs research suggests oil would need to trade in the $150 range for six to twelve months to trigger meaningful demand destruction—reducing global GDP by about one percentage point and U.S. GDP by about half a percentage point.

As inflation rises, some consumers may pull back, slowing growth. The Federal Reserve could also respond by delaying rate cuts. So far, that has not been the case, and March retail sales were strong. The bottom line is that investors should be prepared for higher inflation and the possibility of stagflation-like conditions rather than an immediate recession. Yardeni research notes that major spikes in crude oil prices have historically been followed by moves higher in headline inflation. A resolution to the conflict over the coming months would likely bring a peak in oil prices this quarter and eventual relief.

Year-over-year CPI as of February was 2.4% (Bureau of Labor Statistics); March data has not yet been released. Core PCE inflation (excluding food and energy) was 3.0% year-over-year in February (Commerce Department), while the headline PCE measure rose 2.8% year-over-year. These readings were taken before the recent spike in energy prices. In February, the month-over-month figures for both core and headline measures came in hot, so the next few inflation reports may run higher. The Fed primarily uses the PCE price index to assess inflation trends.

The Federal Reserve held the federal funds rate at 3.50% to 3.75%. If WTI oil declines below $100 in the coming months, the Fed may have room to cut in the second half of the year. The longer the Strait of Hormuz remains meaningfully disrupted, the longer the Fed is likely to stay on hold.

The labor market is holding up, with low levels of both hiring and firing. The unemployment rate edged down to 4.3% (Labor Department). Initial jobless claims have been hovering around 200,000, well below levels seen in prior slowdowns, and continuing claims remain below two million—consistent with an economy still in expansion. Wages rose 3.5% from a year ago, the slowest increase since May 2021. Overall spending remains healthy, and the latest employment data does not yet suggest the war is weakening the labor market.