The Middle East war is expected to subtract 0.2 percentage points from Q2 GDP and 0.3 points from Q3 GDP through supply chain disruptions, higher shipping costs, and energy uncertainty. However, recession risk remains contained as business investment provides an important offset, with non-residential fixed investment contributing roughly 1.4 percentage points to first quarter growth, supported by equipment, technology, AI infrastructure, automation, and reshoring. If the 1990s are any guide, this area of capex could support growth for several more quarters.

Tariff effects appear largely front-loaded, but the Middle East conflict now represents a bigger inflation risk: if it persists through the summer, higher energy, freight, and logistics costs could add as much as one percentage point to inflation this year. Meanwhile, AI is likely to reshape rather than simply eliminate jobs, with efficiency gains potentially increasing demand for AI-enabled work while raising the premium on adaptability and human judgment.

Structural changes — an aging population, a productive labor force, and easing services inflation — give the Fed room to cut rates this year, although the temporary spike in energy prices may delay the continuation of the rate easing cycle.

source: lpl.com/research