Wall Street institutions collectively turn pessimistic: the U.S. economy will face a "Middle East conflict shockwave"

China Financial News Agency, March 26 (Editor Zhao Hao) As the impact of the war in the Middle East gradually becomes apparent, Wall Street has started to lower its forecast for U.S. economic growth this year, while raising its predictions for inflation and the unemployment rate, and slightly increasing the probability of an economic downturn.

Previously, Goldman Sachs said that, due to a surge in oil prices, the risk of a recession in the U.S. over the next 12 months has risen to 30%; it expects the unemployment rate to rise from 4.4% in February to 4.6% by year-end.

Multiple institutions believe that this year’s U.S. inflation rate may be closer to 3% rather than 2%, which would erode consumers’ disposable income and curb corporate hiring.

This shift breaks the earlier optimistic outlook for 2026—previously, the market believed that as tariff shocks gradually fade and the stimulus from tax-cut policies kicks in, the U.S. economy would see a strong year.

Even if the conflict ends soon, economists still believe that the damage already done will keep the U.S. economy in a “fragile equilibrium” state, and job seekers and low-income groups will continue to face pressure.

Nancy Vanden Houten, chief U.S. economist at Oxford Economics, said that the war will weaken multiple links in the economy; the impact “comes very quickly, very directly”—“you can feel it just by driving past a gas station nearby.”

Although the “big and beautiful” bill pushed by Trump increases the amount of tax refunds, cushioning the shock to some extent, outside observers are starting to think that this factor—one that originally supported consumption growth in 2026—may be fully offset by higher energy costs.

According to data from the American Automobile Association, this month gas prices have risen by more than 30%, reaching about $4 per gallon, the biggest increase since the 2005 “Hurricane Katrina” interruption of oil production in the Gulf of Mexico.

Meanwhile, the tax refund data also fell short of expectations. In a report dated March 23, Morgan Stanley said that this year’s tax refund amount is expected to grow year over year by about 12%, below the previous forecast of 15% to 25%. The firm lowered its forecast for consumer spending growth from 2% to 1.7%.

Morgan Stanley economist Arunima Sinha said, “The oil price shock essentially offsets the portion of growth momentum we were relying on earlier.”

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

But that also means the U.S. economy depends to a large extent on investors’ continued optimism about artificial intelligence (AI) and on consumer spending by high-income groups—factors that helped the economy maintain its expansion even as employment growth was nearly zero in 2025.

Forecasting analysts warn that if the fighting ends quickly, the restoration of oil transport through the Strait of Hormuz will still take time; at the same time, damage to Middle East infrastructure and rising demand as countries rebuild inventories after the conflict will keep oil prices at high levels for a period.

U.S. consumers have already felt the pressure when refueling and buying plane tickets. In addition, a fertilizer shortage caused by the war is expected to push up food prices going forward; and rising diesel prices (with the increase even exceeding that of gasoline) will raise transportation costs, which in turn will lift the prices of various goods—including those already 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 still take time to restore production—this will be a long process.”

Many economists believe that a slowdown in spending will translate into fewer hires, which means that after employment growth was unusually weak in 2025, the job market in 2026 may remain lackluster.

Including Citigroup, many Wall Street institutions expect the unemployment rate to rise this year. This is also one of the reasons many firms still insist that the Federal Reserve will resume cutting rates at some point in 2026.

Gisela Young, Citigroup economist, said that if employment growth continues to slow (currently it is already close to zero on average), it will put additional pressure on consumption, while wage growth may also fall again this year.

However, existing data show a more complicated picture. Weekly data on credit card spending from JPMorgan Chase and Bank of America show that, as of mid-March, there has not yet been a clear sign of a spending slowdown, suggesting that consumers have not started to cut spending meaningfully.

Michael Feroli, chief U.S. economist at JPMorgan Chase, said, “In the first two weeks of the conflict, we didn’t see any significant change in consumption. But I think this has indeed weakened the momentum for economic expansion.”

(China Financial News Agency, Zhao Hao)