The US is more vulnerable to recession from an energy shock now than in 2022. The previous shock was absorbed by a hot labor market, high consumer savings, and a $2T reverse repo facility. All three of these buffers are now gone, leaving the economy exposed.

Despite tax cuts, total real after-tax income for Americans has shown zero growth year-over-year as of March. This stagnation in aggregate purchasing power, combined with a low savings rate, signals significant vulnerability for consumer spending, the economy's primary engine.

Despite oil prices doubling, the economy didn't slow down because energy now constitutes a historically low share of consumer budgets. Instead of cutting back, confident consumers simply drew down their savings to cover the higher cost, turning the energy shock into a pure inflationary impulse rather than a demand-destroying event.

Unlike tariffs, which are passed through business costs and can be partially absorbed, an oil shock immediately impacts consumers at the gas pump. This direct hit means the financial pain is felt faster and more universally by households, leading to a quicker and more pronounced change in spending behavior.

While initial energy price spikes boost short-term inflation expectations, a sustained shock eventually hurts economic growth. This growth concern acts as a natural ceiling on long-term inflation expectations (break-evens), as markets anticipate an economic slowdown, preventing them from rising indefinitely.

The economy has been supported by temporary factors like AI mitigating tariff impacts and tax cuts offsetting energy shocks. Now, with inflation persisting, there are no clear monetary or fiscal policy levers available for a quick rescue. The Fed cannot cut rates, and significant new fiscal support is unlikely.

Economists were surprised the Iran war's economic fallout didn't appear in the April jobs report. The likely reason is that larger tax refund checks, which peaked in March and April, temporarily offset the negative effects of higher energy prices, but this fiscal support is now fading.

While larger tax refunds offer a financial lift, low-income households face simultaneous headwinds. The benefit of increased income is at risk of being neutralized by rising costs from tariff-driven inflation and the expiration of Affordable Care Act credits, creating a precarious financial situation for this group.

In 2022, a hot labor market and high savings from stimulus buttressed the economy. Today, households are already dissaving to maintain spending amid a weakening labor market. An oil shock now adds a 1-1.5% price hike across goods, threatening to push real household consumption to zero and stall the economy.