The U.S. economy has shown remarkable resilience over the last two years despite a cooling labor market, trade tensions, and persistent inflation. However, economists are now warning that a combination of emerging and long-standing threats could soon challenge this stability.
The “worry list is growing more worrisome,” Ed Yardeni, president and chief investment strategist of Yardeni Research, wrote in a Sept. 14 report.
While the U.S. economy continues to expand and consumer spending remains steady, several risks are surfacing that could hinder growth and impact the stock market, which has been a primary driver of recent wealth gains. The conflict in Iran shows no signs of abating, and renewed hostilities in the Strait of Hormuz and the Red Sea have pushed oil prices to a four-month high. U.S. diesel prices reached a record $6.23 per gallon on Monday
“There is no shortage of worries for investors in the current environment,” Yardeni said. “The list includes higher oil prices amid escalating tensions in the Middle East, rising bond yields around the world, sticky inflation, and a Federal Reserve that will likely deliver a [0.25 percentage point] <a on Wednesday.
Here are the top risks for the U.S. economy, according to economists and Wall Street analysts.
Inflation fueled by an energy shock
Oil prices have risen in recent weeks, with Brent crude, the international benchmark, reaching $108.45 on Monday as ongoing conflict in the Middle East continues to restrict global supply.
Inflation has moderated slightly since May, when it hit a three-year peak, but the recent surge in oil costs threatens to keep prices high. The Consumer Price Index for August indicated an annual growth rate of 3.4%, which exceeded economist forecasts and remains well above the Federal Reserve’s 2% annual target.
Low- and middle-income households are feeling the most <a s latest consumer sentiment index, which dropped this month to its second-lowest level on record.
“Consumer sentiment eroded more than expected in September, with rising gasoline prices and renewed talk of tariffs taking a particular toll on consumers’ expectations for the economy over the next year,” Oxford Economics said in a research note.
With hostilities continuing in the Middle East, Goldman Sachs noted earlier this month that global oil prices could potentially climb above $120 a barrel. This would exacerbate the fuel costs Americans have faced during the Iran war while placing additional strain on U.S. businesses.
“If sustained long enough, higher energy costs could eventually weigh on economic growth,” Yardeni said.
Rising interest rates
The Federal Reserve is scheduled to announce its next interest rate decision on Wednesday. Many economists anticipate that policymakers will raise the federal funds rate for the first time in over three years, with some analysts on Wall Street projecting further increases.
“The bigger risk is that September is not one and done,” Yardeni wrote.
A cycle of interest rate hikes would increase borrowing costs for both businesses and consumers, while simultaneously curbing inflation by slowing economic activity.
At the same time, a series of rate increases could “tighten financial conditions and could pressure both <a creating downward pressure on stock prices, Yardeni said.
Record-high federal debt
The fiscal position of the federal government also presents a risk, particularly as the national debt has recently surpassed $40 trillion.
The U.S. currently spends more on interest payments to service its debt than it does on Medicare or national defense. The government could face even steeper debt-servicing costs if the Federal Reserve continues to raise interest rates, as the U.S. would be required to offer investors higher yields.
“If interest rates keep rising, higher debt-service costs will worsen the budget deficit outlook and require more Treasury issuance,” Yardeni said.
A deflating AI bubble
Although the stock market is not synonymous with the economy, rising equity valuations have bolstered household wealth, increased retirement savings, and created thousands of new millionaires across the U.S.
A significant portion of the market’s growth has been driven by high expectations for artificial intelligence companies. However, investors are increasingly questioning whether the earnings produced by AI will justify the massive capital expenditures companies are pouring into the technology.
Upper-income consumers, supported by gains in the stock market, have demonstrated more resilience than lower-income households over the past two years. This phenomenon is often referred to as a “K-shaped economy,” with wealthier individuals representing the upper arm of the K.
But a decline in the stock market could threaten that segment of the economy, Brandon Zureick, chief economist at Johnson Investment Counsel, told CBS News.
“That upper end of the K is, in our opinion, certainly anchoring overall consumer spending and growth, while near the bottom end of the K, real incomes are kind of barely keeping up with the cost of living,” Zureick said.
If AI valuations decline and drag the broader market down, “You could definitely see consumer spending slow,” he added.
