Wall Street Institutions Turn Pessimistic: U.S. Economy Faces “Middle East Conflict Shockwave”

As the economic repercussions of the Middle East conflict become increasingly evident, Wall Street institutions have revised down their growth forecasts for the U.S. economy this year while raising projections for inflation and unemployment and modestly increasing the probability of a recession. Goldman Sachs has estimated that, driven by a surge in oil prices, the probability of a U.S. recession within the next 12 months has risen to 30%, and it expects the unemployment rate to climb from 4.4% in February to 4.6% by year‑end. Several other firms now anticipate inflation nearer to 3% rather than 2% for the year, a shift that would erode disposable incomes and weigh on corporate hiring plans.

This reassessment reverses earlier optimism for 2026, when fading tariff effects and tax cuts were expected to support a robust expansion. Economists caution that even a rapid cessation of hostilities would not immediately undo the damage already inflicted; the economy is likely to remain in a fragile equilibrium, with jobseekers and lower‑income households particularly exposed. Nancy Vanden Houten, Chief U.S. Economist at Oxford Economics, observed that the conflict is impairing multiple economic channels in ways that are both swift and tangible, noting that the impact is visible even at local gas stations.

Although recent tax refund increases under the “Big and Beautiful” legislation have provided some offset, analysts warn that higher energy costs could fully negate that support. Data from the American Automobile Association indicate gasoline prices have risen more than 30% this month to roughly USD 4 per gallon, marking the largest monthly increase since Hurricane Katrina disrupted Gulf oil production in 2005. Refund figures have also disappointed expectations: Morgan Stanley reported on March 23 that refund amounts are up about 12% year‑on‑year, below prior forecasts of 15%–25%, and consequently trimmed its consumer spending growth projection from 2% to 1.7%. Morgan Stanley economist Arunima Sinha commented that the oil price shock has effectively offset the growth impulse the firm had been counting on.

Most forecasts nonetheless still project U.S. growth near 2% for the year, supported primarily by continued investment in data centers, which are less exposed to imported energy given relatively inexpensive domestic natural gas. That said, this outlook depends heavily on sustained investor optimism about artificial intelligence and continued consumption by higher‑income households—factors that helped sustain expansion in 2025 despite minimal job growth. Forecasters warn that even if oil shipments through the Strait of Hormuz resume, rebuilding damaged infrastructure and post‑conflict restocking will sustain upward pressure on prices for some time. Consumers are already feeling strain at the pump and in airfares, and analysts expect fertilizer shortages to push food prices higher while rising diesel costs increase transportation expenses and feed through to goods already affected by tariffs.

Jennifer Lee, Senior Economist at BMO Capital Markets, emphasized widespread concern over how long stabilization will take, noting that even an immediate end to hostilities would leave a lengthy recovery period for production. Many economists expect slower spending to translate into weaker hiring, implying that after an unusually weak employment performance in 2025, the labor market may remain subdued in 2026. Several Wall Street firms, including Citigroup, project a rise in the unemployment rate this year, a view that underpins expectations that the Federal Reserve may resume cutting rates at some point in 2026. Citigroup economist Gisela Young warned that continued weakness in job growth—currently averaging near zero—would further depress consumption and likely slow wage growth again this year.

Nevertheless, recent high‑frequency data present a more nuanced picture. Weekly credit‑card spending tracked by JPMorgan Chase and Bank of America showed no clear signs of a consumer pullback through mid‑March, indicating households have not yet materially curtailed spending. Michael Feroli, Chief U.S. Economist at JPMorgan, observed that consumption did not change markedly in the conflict’s first two weeks, but he added that the episode has nonetheless weakened the economy’s expansionary momentum.