Wall Street Institutions Collectively Turn Pessimistic: U.S. Economy to Face "Middle East Conflict Shockwave"

As the impact of Middle East conflicts becomes more apparent, Wall Street is beginning to lower its expectations for U.S. economic growth this year, while raising inflation and unemployment rate forecasts, and slightly increasing the probability of a recession.

Previously, Goldman Sachs stated that due to soaring oil prices, the risk of a U.S. recession in the next 12 months has risen to 30%; they expect the unemployment rate to increase from 4.4% in February to 4.6% by the end of the year.

Several institutions believe that U.S. inflation this year may be closer to 3% rather than 2%, which would erode residents’ disposable income and suppress corporate hiring.

This shift breaks the earlier optimistic outlook for 2026—initially, markets believed that as tariffs’ impact waned and the stimulus from tax cuts took effect, the U.S. economy would experience a strong year.

Even if the conflict ends quickly, economists still believe the damage already done will keep the U.S. economy in a “fragile balance,” with job seekers and low-income groups still facing pressure.

Nancy Vanden Houten, Chief U.S. Economist at Oxford Economics, pointed out that the war will weaken multiple parts of the economy, and this impact is “very rapid and very direct,” “you can feel it just by driving past a nearby gas station.”

Although the “Big and Beautiful” bill introduced by Trump increased tax refunds and somewhat buffered the impact, external opinions are beginning to suggest that this previously crucial factor supporting consumption growth into 2026 may be fully offset by higher energy costs.

According to data from the American Automobile Association, gasoline prices have already risen over 30% this month, reaching about $4 per gallon, the largest increase since the disruption of Gulf oil production caused by Hurricane Katrina in 2005.

Meanwhile, tax refund data has also fallen short of expectations. Morgan Stanley’s report on March 23 stated that this year’s tax refunds increased by about 12% year-over-year, below the previously expected 15% to 25%. The bank downgraded its consumer spending growth forecast from 2% to 1.7%.

Morgan Stanley economist Arunima Sinha said, “The oil price shock has essentially offset the growth component we previously relied on.”

Overall, most forecasts still expect U.S. economic growth to remain around 2% this year, mainly thanks to continued growth in data center investments—since the U.S. has relatively cheap natural gas, this sector is less affected by imported energy.

However, this also means that the U.S. economy largely depends on investors’ continued optimism about artificial intelligence (AI) and high-income consumer spending—factors that helped sustain expansion in 2025 despite nearly zero employment growth.

Forecasts warn that if the conflict ends quickly, the resumption of oil transportation through the Strait of Hormuz will still take time; additionally, damage to Middle Eastern infrastructure and increased demand from countries replenishing inventories after the conflict will keep oil prices high for a period.

U.S. consumers are already feeling the pressure when refueling and buying tickets. Moreover, the fertilizer shortages caused by the war are expected to push food prices higher in the future; rising diesel prices (even exceeding gasoline increases) will also raise transportation costs, further boosting prices of various goods, including those previously affected by tariffs.

Jennifer Lee, Senior Economist at BMO Capital Markets, said, “Everyone is worried about how long it will take for the situation to stabilize. Even if it ends today, it will take time to restore production, and this will be a long process.”

Many economists believe that a slowdown in spending will translate into reduced hiring, meaning that after 2025’s unusually weak employment growth, the job market may continue to remain sluggish in 2026.

Several Wall Street institutions, including Citigroup, expect the unemployment rate to rise this year. This is also one of the reasons many still believe the Federal Reserve will resume rate cuts at some point in 2026.

Gisela Young, an economist at Citigroup, pointed out that if employment growth continues to slow (currently approaching zero on average), it will put further pressure on consumption, and wage growth may decline again this year.

However, existing data presents a more complex picture. Weekly credit card spending data from JPMorgan and Bank of America show no obvious signs of consumption slowdown as of mid-March, indicating consumers have not yet begun to significantly cut back on spending.

Michael Feroli, Chief U.S. Economist at JPMorgan, said, “In the first two weeks of the conflict, we didn’t see a noticeable change in consumption. But I believe it has indeed weakened the momentum of economic expansion.”

(Article source: Cailian Press)