Resilience Tested: What's at Stake for the US Economy
episode
The Decisive Podcast: Insights and analysis to empower confident decision-making.
18 min
2 speakers
7 chapters
transcribed 1 month ago
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What is the baseline outlook for US growth and inflation amid the Middle‑East war?
You're listening to the Decisive Podcast insights and analysis to empower confident decision making.
Hello and welcome to the Decisive Podcast. I'm your usual host, Kristen Hallam. In this week's episode, we have taken a selection from our client webinar with the S ⁇ P Global Market Intelligence US macroeconomic team. Ben Herzon, co-head of US economics, Michael Zedinek, Director, US economics, and Lawrence Nelson, principal US economist. Moderated by Emily Crowley, head of our pricing and purchasing research team, the discussion covers our base case for the US economy, how we bracket a plausible range of outcomes outside our base case, and what the Federal Reserve has in store now that Kevin Walsh is the new chair. Without further ado Here's Emily to kick us off.
Can you walk us through your baseline outlook, including your key assumptions about developments surrounding the war in the Middle East?
Here are the current hallmarks of the US forecast. We expect the US economy to remain resilient in 206 with growth close to potential despite the near-term drag from the war in the Middle East. Part of that story comes from the resilience we saw last year, with the US remaining resilient despite the swings in trade from changes in terror policy and growth near potential, just about 2% over the four quarters of 2025. Surging energy prices and then the slower growth of real income and wealth are expected to weigh on consumer spending, and growth is expected to ease to one point six percent over the four quarters, and then to pick up afterwards. With that, the unemployment rate is expected to rise to a peak of four point eight percent by the first quarter of twenty twenty seven.
This puts policymakers in a tough spot. They're trying to balance their dual mandate of maximum employment against rising prices, and prices in our baseline are expected to rise as tariffs and now elevated oil prices push through to finished goods. That has the Federal Reserve on pause in our forecast, with easing not resuming until June of next year, three months later than in last month's forecast. Prior to the war, our outlook was broadly optimistic for 2026, and the reason for this was twofold. First, despite the significant uncertainty last year, the US economy had remained resilient, as I said, and grew at a rate near potential. And the drivers of the uncertainty were at that time tariff rates, swings in the GP source data, and uncertainty about the impact of so much uncertainty and the effects of things like the government shutdown.
Now we're facing oil prices and oil shock. And second, The reason why our outlook was more optimistic was a Along with with the decline in uncertainty last year, we saw a recover in equity prices. We're seeing something similar right now. And so that's factoring strongly into our baseline outlook for the rest of the year. And the reason for this was twofold. Markets were increasingly less concerned about The impact of tariffs and things like the historically low levels of consumer sentiment and this fear or talk of an imminent recession never really materialized. Now.
How do oil‑price shocks, equity values, and financial conditions shape the pessimistic scenario?
The outbreak of the war obviously changes that. And so what's going to matter for the US economy are three things. First, how high low prices will go and how long they'll remain elevated. This feeds into core inflation, a headline and core inflation in our forecast, which again reachens real income and well spend and sovereigns consumer spending. The second question is how low will equity values go and how tight financial conditions will get as a result. Weak equity values again feed feedback negatively into goods of spending and tight financial conditions feedback negatively into business spending. And then the third thing we're watching is how will that shock unfold materially? Will it weaken consumer and business confidence sufficiently enough that there are knock-on effects to the broader economy?
And that's where we start to get the risk of the recession dynamics coming into play. Our baseline forecast includes the assumptions that supply conditions remain tight for months, even if today's ceasefire holds.
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Chapters
7 chapters
1
What is the baseline outlook for US growth and inflation amid the Middle‑East war?
0:03–3:06
2
How do oil‑price shocks, equity values, and financial conditions shape the pessimistic scenario?
3:06–5:16
3
What would it take for a recession to materialise in the 2026 outlook?
5:16–7:57
4
Why are Fed rate cuts postponed until mid‑2027 and what drives that decision?
7:57–10:26
5
How will the new Fed chair Kevin Walsh’s agenda affect monetary policy and inflation targeting?
10:26–13:38
6
What role do tariffs and immigration trends play in the US inflation forecast?
13:38–16:43
7
How do the latest PCE inflation numbers and core‑inflation trends influence the Fed’s forward guidance?
16:43–18:46
Speakers
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