Contrary to the long-term belief that AI will be deflationary, the current surge in demand for computer equipment for data centers is stronger than supply, causing prices to spike and contributing significantly to producer price inflation (PPI).
The team's central economic forecast hinges on the belief that President Trump's sensitivity to falling stock prices and rising gas prices will compel him to de-escalate the conflict with Iran within weeks, preventing a recession.
Even if President Trump pivots and declares victory, the economic forecast's weak point is the assumption that Iran will immediately stand down. Iran may leverage the situation to extract guarantees, keeping oil prices high and undermining a market recovery.
The economy can likely absorb a temporary spike to $100/barrel oil, supported by fiscal stimulus. However, if prices reach and sustain $120/barrel for a few months, the psychological and financial strain on consumers and businesses would likely trigger a recession.
There are three paths to better housing affordability: falling prices, lower interest rates, or rising incomes. The forecast suggests the most probable path is for home prices to flatten while incomes continue to grow, gradually restoring affordability without a damaging price crash.
The U.S. economy entered the current geopolitical crisis with pre-existing "stagflation-esque" conditions: a weak labor market with nearly zero job growth and simultaneously high inflation. This dual vulnerability makes the economy particularly susceptible to a recession triggered by an oil price shock.
A Moody's machine learning model, which analyzes leading economic indicators, had already calculated a 48.6% probability of recession *before* the Iran conflict began. The primary driver for this high reading was a deteriorating labor market, indicating underlying economic weakness.
Despite the economic risks from higher oil prices, the Federal Reserve is unlikely to cut interest rates. The central bank is firmly focused on high pre-existing inflation and rising inflation expectations, and geopolitical uncertainty will likely cause them to hold policy steady rather than provide stimulus.
Despite being the world's largest oil producer, the U.S. economy remains highly vulnerable to global price spikes. Oil is a global commodity, and the U.S. is a price taker. Domestic production doesn't shield consumers from prices set by international supply and demand dynamics.