TLDR
- Morgan Stanley titled its midyear outlook “Capex Over Consumption,” signaling AI investment is carrying the economy
- U.S. GDP growth forecast at 2.3% for 2026, with no recession expected under the base case
- Higher energy costs are wiping out the average household’s $320 tax refund from the One Big Beautiful Bill Act
- The Fed is expected to hold rates through 2026, with two cuts coming in March and June 2027
- A new Fed Chair, Kevin Warsh, could bring less public communication and more market uncertainty
Morgan Stanley released its midyear U.S. economic outlook on May 12, 2026, under a four-word title: “Capex Over Consumption.” That title sums up the core tension in the U.S. economy right now.
Chief U.S. Economist Michael Gapen and his team are not predicting a recession. But they do see an economy running on uneven ground.
Corporate spending on artificial intelligence is doing the heavy lifting. Meanwhile, everyday consumers are losing ground to rising energy costs.
GDP Growth Forecast and the Oil Shock
Morgan Stanley forecasts U.S. real GDP growth of 2.3% in 2026 and 2.6% in 2027. That base case assumes a gradual de-escalation of tensions in the Middle East.
The bank calls the current oil price surge the fourth major supply shock to hit the U.S. in recent years. The previous three were the Covid pandemic, the Russia-Ukraine war, and the 2025 tariff disruption.
Brent crude was around $70 per barrel in early February. It has since ranged between $90 and $120. Morgan Stanley’s base case assumes oil settles between $80 and $90 for the rest of 2026.
The bank says its baseline forecasts are “less relevant than normal” given the volatility and that it is “prepared to revise early and often.”
How Energy Costs Are Hurting Consumers
Consumer spending growth is forecast to slow to 1.8% in 2026, down from 2.1% in 2025.
The One Big Beautiful Bill Act boosted average household tax refunds by around $320, a 17% year-over-year increase. But Morgan Stanley calculates that if retail gas prices average $3.60 per gallon, that gain is completely wiped out.
Real labor income is expected to grow just 0.8% in 2026. The pain is concentrated in lower and middle-income households, who spend more of their budgets on energy.
The bank notes the top 20% of earners hold over 70% of household net worth and nearly 90% of corporate equities. “The focus is back on the upper-income consumer,” the report states.
AI Spending Fills the Gap
Where consumers are pulling back, corporations are stepping in. Morgan Stanley forecasts nonresidential business fixed investment growth of 7.0% in 2026 and 8.0% in 2027.
The five largest hyperscalers — Amazon, Alphabet, Meta, Microsoft, and Oracle — are expected to spend around $805 billion in capital expenditure in 2026. That figure is projected to exceed $1 trillion in 2027.
Morgan Stanley describes AI-related spending as structural, not cyclical. It is not expected to slow due to oil prices or weak consumer sentiment.
The bank’s research found AI-related job displacement has raised the unemployment rate by at most 0.1 percentage point. High-AI-exposed industries drove 1.7 percentage points of the 2.4% gain in nonfarm business productivity in 2025.
The Fed and What Comes Next
Morgan Stanley expects the Fed to hold rates at 3.50% to 3.75% through the end of 2026. Two cuts of 25 basis points each are expected in March and June 2027, bringing the terminal rate to between 3.0% and 3.25%.
The bank previously expected cuts to begin in January 2027. That timeline has been pushed back.
Core PCE inflation is projected at 2.8% in 2026 and 2.3% in 2027. Headline PCE is expected to peak at 3.9% in May 2026 before declining.
The report also flagged a potential shift under incoming Fed Chair Kevin Warsh. A Warsh-led Fed may communicate less publicly, which could create short-term uncertainty for markets.
Morgan Stanley outlined four alternative scenarios. In the most severe, Brent crude surges to between $140 and $160 per barrel, pushing the global economy into recession.
April retail sales showed weakness in real terms, though upward revisions to February and March data suggest some upside risk to consumption. The bank noted that next week’s quarterly services survey could offer more clarity.
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