The Economy Is on the Edge: Potential Risks and Opportunities

The economy has several vulnerabilities that could erupt as high oil prices bite

April 1, 2026 5:30 am ET

The U.S. economy made it through Covid inflation and tariffs without rolling over. Can it survive the shock of surging oil prices?

Answering that question is more treacherous than usual. Many of the drivers that have powered growth through the past few years, such as the AI boom and free-spending consumers, are also vulnerabilities. Meanwhile, policy uncertainty remains unusually high, according to an index based on news articles devised by three academics.

Here is a look at best-case and worst-case scenarios.

Whither oil: a gentle decline, or up to $200

Though recessions have regularly followed spikes in the price of oil, economists don’t expect one this time. That is even after Iran effectively closed the Strait of Hormuz, shaving as much as 16 million barrels from daily petroleum supplies, equivalent to 15% of prewar demand.

Michael Haigh of Société Générale, a French bank, reckons that if the strait is shut for two more weeks, global inventories will fall to historically low levels and Brent crude, which closed at $118.35 on Tuesday, could hit the record of $146 a barrel set in 2008. Dubai crude, which is in shortest supply, already topped $150 last week.

Why are economists calm? Adjusted for inflation, $146 is 33% lower now than in 2008. The U.S. economy is less oil-dependent. The market doesn’t think oil will stay this high for long: Futures markets peg the price of Brent delivered in April next year at around $80 a barrel.

Goldman Sachs Chief Economist Jan Hatzius estimates that if Hormuz opens by mid-April, the U.S. economy will be 0.4% smaller in a year than without the closure. In other words, the U.S. will have modestly slower growth but no recession.

Worse outcomes are easy to imagine. Saudi Arabia has bypassed Hormuz by shipping about 4.5 million barrels a day from the Red Sea port of Yanbu. Iran could try to strike the port or the East-West pipeline that supplies it. Iran-backed Houthi rebels in Yemen could attack ships transiting through the south end of the Red Sea. Brent could go as high as $200 a barrel, Haigh said, with a caveat: “I’m guessing at this point…This is unprecedented.”

The market is vulnerable to outages anywhere, from hurricanes, industrial action or cyberattacks. Intensifying Ukrainian attacks on refining and exporting operations recently disrupted Russian shipments though the Baltic Sea.

—Joe Wallace

Private-credit troubles: sideshow or main event

The Wall Street firms behind private credit—roughly $1.3 trillion in the U.S., and more than $2 trillion worldwide—are under new pressure. The firms raise money from investors, big and small, and lend it out to companies that historically had a harder time getting bank loans. The interest they collect is paid to investors as dividends. Now, investors are nervous about loans to shaky sectors like software and want their money back.

Michael Dimler, senior vice president of private corporate credit at Morningstar DBRS, attributed the stress to a normal credit downturn where performance of loans weakens while newer investors seek to get their money back.

But there are channels through which the pain could spread. Wall Street banks lend to private-credit firms, with the loan funds as collateral. The banks say they are exposed to the safest parts of those deals. Still, defaults on the loans have risen, and bank shares have been falling.

Christopher Whalen, chairman of credit-markets research and advisory firm Whalen Global Advisors, fears “a Lehman kind of moment,” referring to when Lehman Brothers failed in 2008 after lenders yanked funds.

“What you have to worry about is forced liquidations of loan portfolios where everyone is selling at once,” said leveraged-finance lawyer Richard Farley.

If the companies do struggle to get financing, they might have to cut investment and jobs, or even default, spreading stress through the economy.

—AnnaMaria Andriotis

After an AI boom, a bust?

The economy and stock market powered ahead last year in part thanks to artificial intelligence. The top nine U.S. companies by market capitalization, all tech giants, make up about 35% of the S&P 500 index, and most have bet their futures on AI.

That could carry the economy through the energy squeeze. Alphabet, Amazon, Meta Platforms, Microsoft and Oracle are projected to spend more than $2 trillion combined in the next three years, mostly on data centers and chips, according to Morgan Stanley.

But AI has begun to look frothy to some, with investment—much of it debt-financed—running ahead of revenue.

Energy and shipping constraints from the Iran war will likely make it more difficult to build out data centers, said Todd Castagno, head of global valuation, accounting and tax within Morgan Stanley’s research division. Middle Eastern sovereign-wealth funds are also huge sources of capital for some of the largest private AI companies, including OpenAI and Anthropic.

At the same time, funding for AI infrastructure is starting to slow and investors are starting to worry about a scarcity of capital. “The whole ecosystem is more capital constrained than people think it is,” Castagno said. Anything that brings the data-center build-out to a halt could kick the props out from under the economy.

—Angel Au-Yeung

The consumer rolls over

Lower-income Americans have struggled with the end of pandemic-era aid and inflation. Credit-card delinquency rates for low- and medium-income borrowers are now higher than at the prepandemic economic peak, according to economist Breno Braga with the Urban Institute think tank.

Yet consumption has remained solid through early 2026. The key reason: Upper-income households, buoyed by last year’s rise in stock prices, keep spending.

In the short run, they are relatively insulated from high gas prices. They spend less on gasoline. Their cars tend to be more fuel-efficient.

A stock selloff could take the wind out of affluent families’ spending, as higher gas prices push lower-income families over the edge. Duke University economist Matthias Kehrig calculated that, for lower-income commuters, the $1 rise in gas prices in the past month is equivalent to 2% of income. Since few have alternatives to driving, “something else has to give,” he said.

—Dan Frosch

Treasury as shock absorber or amplifier

Even if businesses or consumers stumble, the federal government can usually soften the blow by boosting spending, cutting taxes or bailing out the financial system. Indeed, one reason economists are somewhat sanguine about higher energy prices is that last year’s tax law is putting cash in Americans’ pockets through bigger tax refunds and lower paycheck withholding. It is effectively an unplanned shock absorber.

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But in a worst-case, albeit remote, scenario, the federal government can amplify rather than absorb shocks. The U.S. finances its fiscal obligations by issuing Treasury securities. These low-risk investments underpin the global financial system and provide a haven for capital in a wild world. A loss of investor confidence in Treasurys could cause interest rates to rise sharply, hitting housing, business investment, and stock markets—and potentially causing a recession.

There have been wobbles. Since the war with Iran began, the yield on 10-year notes climbed above 4.4% from below 4%, closing Tuesday at 4.32%. Last week’s Treasury auctions were shakier than usual.

That is nothing to worry about—yet. Yields were higher at times last year, and much higher during the 1980s and 1990s.

Still, the safety of Treasury debt is a function of math and confidence. The U.S. fiscal arithmetic has zoomed past thresholds that once seemed calamitous. Annual interest costs consume nearly 20% of revenue. Debt as a share of the economy is approaching a record. Social Security will be insolvent in 2032. There is no magic number where U.S. debt becomes unsustainable, but every tick upward leaves the government more exposed to interest-rate fluctuations and less able to respond to a crisis.

The U.S. will probably muddle along. But a sentiment shift, however unlikely, could be quick. “People, entities and even nations in the past that decided that it can’t happen here were right—until they weren’t,” said Mitch Daniels, budget director under President George W. Bush.

—Richard Rubin

Appeared in the April 2, 2026, print edition as ‘What’s Next for the U.S. Economy?’.

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