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The economy is holding up fairly well during the energy price shock of 2026. However, the shock is ongoing, and the longer it continues, the greater the likelihood it will inflict significant damage to the economy. The rise in energy prices, which began in late February, occurred too late to have anything more than a slight impact on first-quarter GDP growth, but data for the second quarter are just starting to be released and have yet to show a material effect.
A surge in equipment investment of 17.2% and a recovery in federal government spending of 9.3%, following the shutdown of the fourth quarter, helped propel the economy to a 2.0% GDP growth in the first quarter. However, even before the energy price shock, spending related to the household sector was showing signs of cracks. Consumer spending rose 1.6%, the second consecutive quarter below 2%, and residential investment fell 8.0%, the fifth consecutive quarterly decline. The energy price shock will widen those cracks. If the shock persists into the second half, the risks of a recession would be substantial.
The surge in investment mainly reflects activity connected to data centers and the equipment needed to fuel the AI Revolution. Investors in that sector are sufficiently deep-pocketed to continue growing their projects at a rapid rate. In contrast, the finances of many consumers are stretched. This was already apparent before the energy price shock, which will make things significantly worse.
Declining savings rates stress household economy
One manifestation of stress for households is the ongoing decline of the personal saving rate. It has dropped from 5.6% in 2023 to 5.4% in 2024 to 4.6% in 2025. In the first quarter of 2026, the saving rate was down to 4.0%. In March—when gasoline prices rose to a record 21.2% in the Consumer Price Index— households absorbed the shock by further depleting their savings, with the saving rate for that month dropping to 3.6%.
With an additional large energy price increase in April and more increases looming in subsequent months, a large number of households are reaching the point where savings are depleted, and more severe retrenchment in spending becomes likely. The increase in gasoline prices recorded in March and estimated for April and May will reduce consumer purchasing power by about 1.3% if those increases are sustained for a year. That’s a significant shock by any standard and comes at a time when growth in consumer spending has already slowed below 2%.
Most industrialized countries have so far been able to avoid physical shortages of oil and natural gas. This reflects ample reserves. Tankers at sea have served as a secondary source of reserves. Some developing countries are already being severely affected and are taking emergency measures to curb the consumption of oil or natural gas. The number of countries having to do this will grow in the coming weeks and will include some of the United States’ largest trading partners. As a result, the current energy price shock is likely to eventually affect supply chains in a wide variety of industries, including electronics, autos, semiconductors, shipping, apparel, and other consumer goods. Food production in certain parts of the world is already being affect by the loss of fertilizer supplies that previously traversed the Persian Gulf.
As of now, the world can expect to see moderate food price inflation, severe fertilizer inflation, localized disruptions in planting certain crops, and potentially a significant reduction in food production in the second half of 2026 and 2027. Since late February, nearby futures rice prices have been up about 10% and smaller price increases have been seen for wheat, corn, and soybeans.
Central bankers, including the Federal Reserve, have taken a wait-and-see approach so far to these unfolding events. A more serious reckoning may come as soon as June or July, and the choice is going to be an unpalatable one that must balance the need to maintain credibility, at a time when inflation is still above their target, with the need to head off or cushion a recession.
