What would it take to tip the economy into recession?

Recession is not our base case, but we believe the risk distribution has shifted decisively to the downside, as oil briefly broke above $110/barrel and remains volatile. The U.S. economy does not enter the current oil price shock from a position of robust strength. With headline inflation on its way back above 3% as soon as this month, higher oil prices add a new headwind at a moment when the U.S. economy's margin for error is narrow.
Recessions ultimately reflect broad and persistent declines in activity. An oil price shock becomes recessionary when it turns a slowing expansion into a self-reinforcing downshift: real income falls, consumption growth slows, investment contracts, hiring weakens, and income declines further.
Our model simulations suggest that a 50% sustained increase in oil prices would reduce annual average growth of real personal consumption expenditures (PCE) by a full percentage point—more than offsetting the expected boost to consumer spending from the One Big Beautiful Bill's household tax cut provisions.
In an additional modeling exercise, sustained oil prices at $130/barrel, which is a ~100% increase from the pre-conflict baseline, would lead to back-to-back contractions in quarterly PCE in the middle part of this year.
Higher oil prices tend to provide a boost to business fixed investment, primarily through increased energy-sector spending. This energy investment impulse is layered on top of a structural capex boom tied to the generative AI build-out, which has been relatively insensitive to energy costs and broader macro volatility.
Moderate increases in oil prices tend to reallocate growth, rather than eliminate it: consumer spending slows, but investment accelerates, helping to stabilize aggregate demand. However, this offset is neither full, nor immediate.
As a net energy exporter, the U.S. economy can better weather higher oil prices than many other countries, but sustained prices north of $130/barrel would materially raise the risk of recession.

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