U.S. economy in a 'multi-dimensional' supply shock environment, says EY Parthenon's Chief Economist

Summary

• U.S. economy is in a "multi-dimensional shock environment" with concurrent supply shocks from trade tensions, tariffs, AI adoption, and Middle East conflict.
• Projects U.S. real GDP growth decelerating to around 1.5% by year-end, with inflation rising towards 4% and settling near 3%, creating a stagflationary feel without outright stagflation.
• Expects the Federal Reserve to maintain current interest rates for the foreseeable future, as inflation remains above the 2% target and policymakers view labor market risks as balanced.
• Consumer spending, while nominally healthy, is unsustainable with real disposable income growth around 1% versus spending at 2.5%, forcing reliance on savings, credit, and wealth.
• Energy price shocks from the Middle East conflict are estimated to impose a $350 negative hit per household, more than offsetting the average $300 tax refund benefit from recent legislation.
• Baseline oil price assumption: Brent crude sliding to $85 per barrel in Q3 and $80 by year-end, still $15 above pre-conflict levels, with upside risks that could push inflation to 4.5-5% and growth below 1%.
• Unusual interest rate dynamic: geopolitical conflict has not lowered long-term Treasury yields due to priced-out Fed rate cuts, higher inflation expectations, and fiscal sustainability concerns.