Analysis October 28, 2026 at 02:46 AM
The U.S. economy was one of the first to recover from the negative effects of the pandemic, with strong residential investment and consumer spending boosting real GDP by 5.7% in 2021. However, upward economic momentum has started to ebb in recent months.
Risk 1: Second Wave of Inflation
Possible triggers: Double-digit increases in the consumer price index for two consecutive months (or more) in the second half of 2022.
EIU expectations: Price pressures will slacken in the second half as energy prices stabilize and supply-chain constraints begin to ease. Annual inflation will slow to around 7.8% this year and to 3.7% in 2023. Household spending will continue to grow year on year, albeit at a sharply reduced pace, thanks to robust household balance sheets and two years of pent-up demand.
Downside scenario: Several risks could precipitate a second wave of inflation that would have a more damaging effect on household spending:
- The war in Ukraine intensifies again in the coming months, pushing commodity prices even higher and causing a drop-off in Russian energy supplies that would push energy prices up once again.
- The emergence of another Covid variant severe enough to prompt national lockdowns — highly unlikely in the U.S., but China's zero-Covid policy could affect industrial production and global trade flows, pushing consumer goods prices up.
(Image: Shutterstock)
Risk 3: Asset Price Collapse
Possible triggers: The U.S. bear market deepens. U.S. stock market indexes fall by 40% or more from their recent peak by July as a result of one or more of these factors, without changes in monetary policy to compensate.
EIU expectations: U.S. stock prices will continue to cool in the second half as the Fed begins to withdraw its stimulus and the pace of economic growth starts to slow. However, the Fed will maintain a gradual approach to tightening, helping to prevent a severe collapse in asset prices.
Downside scenario: Although stock markets have officially entered bear market territory (down by at least 20% from a recent peak), asset prices remain well above their pre-pandemic levels. Both the S&P 500 and Nasdaq are up by 10% compared with February 2020.
The cyclically adjusted price-to-earnings ratio developed by Robert Shiller stood at 32 in early June, more than double its low point of 15 reached during the global financial crisis, which suggests that many assets are still overvalued.
This means that asset prices have more room to fall if the economic outlook turns south — for example, if the Fed were to embark on a much more aggressive path of tightening than the market currently expects, or if consumer demand were to contract because of another spike in inflation or another Covid variant.
A collapse in asset prices would exacerbate the drop in consumer spending, as downward movements in household wealth tend to depress more short-term household spending.
(Image: Shutterstock)
