The title of Morgan Stanley’s midyear US economic outlook, published May 12, is four words: “Capex Over Consumption.” It is the bank’s clearest possible signal about what is holding the American economy together heading into the second half of 2026, and what is beginning to buckle beneath the surface.
Chief US Economist Michael Gapen and his team are not calling for a recession. But the report paints a picture of an economy running on uneven foundations, where AI-driven corporate investment is doing the heavy lifting while the American consumer loses momentum under rising energy costs.
Morgan Stanley’s US growth outlook and the fourth supply shock
Morgan Stanley forecasts US real GDP growth of 2.3% in 2026 and 2.6% in 2027, avoiding a recession under its base-case scenario of gradual Middle East de-escalation, according to Morgan Stanley Research. The bank characterizes the current oil price surge as the fourth major supply shock to hit the US economy in recent years, following the COVID pandemic, the Russia-Ukraine conflict, and the 2025 tariff disruption.
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Brent crude, which was trading around $70 per barrel in early February, has ranged between $90 and $120 per barrel since. Morgan Stanley’s baseline assumes oil settles in the $80 to $90 range for the rest of 2026. The bank describes conditions as one where baseline forecasts are “less relevant than normal” and it remains “prepared to revise early and often.”
“This would be another data point that suggests the US economy has exited the low inflation, low interest rate, loose monetary policy, and tight fiscal backdrop that characterized the post-GFC economy,” the report states. The shift, in Morgan Stanley’s framing, is from a system optimized for efficiency to one optimized for resilience.
Why the American consumer is losing ground to energy costs in 2026
Morgan Stanley forecasts real consumer spending growth to decelerate to 1.8% in 2026 from 2.1% in 2025, before recovering to 2.1% in 2027 as energy prices normalize. The mechanism is specific. The One Big Beautiful Bill Act boosted average household tax refunds by approximately $320, a 17% year-over-year increase. But Morgan Stanley’s calculations show that if retail gasoline prices average $3.60 per gallon, higher energy costs completely neutralize that fiscal benefit on spending.
Real labor income is expected to rise just 0.8% in 2026. Real disposable income growth holds at 1.2%. The weakness is concentrated in lower and middle-income households, who spend a disproportionately large share of their budgets on energy. “The focus is back on the upper-income consumer,” the report states, noting the top 20% of earners hold more than 70% of household net worth and nearly 90% of corporate equities.
The four-word title of Morgan Stanley’s latest US economic report says more about 2026 than most investors have fully processed.
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How AI capital expenditure is carrying the broader US economy
Against a weakening consumer, corporate AI spending is the economy’s main support pillar. Morgan Stanley forecasts nonresidential business fixed investment growth of 7.0% in 2026 and 8.0% in 2027. Hyperscaler capital expenditure is projected to exceed $1 trillion in 2027, according to Yahoo Finance. The five largest hyperscalers, Amazon, Alphabet, Meta, Microsoft, and Oracle, are expected to collectively spend approximately $805 billion in capital expenditure in 2026 alone.
The bank characterizes AI-related spending as more structural than cyclical, meaning it is not sensitive to oil shocks or consumer sentiment the way traditional business investment typically is. “We think this spending will show up and support economic activity,” the report states. Morgan Stanley’s original research found that AI-related displacement has, at most, raised the unemployment rate by just 0.1 percentage point, according to Investing.com. High-AI-exposed industries drove 1.7 percentage points of the 2.4% gain in nonfarm business productivity in 2025, primarily through faster output growth rather than job cuts.
Key figures from Morgan Stanley’s May 12 midyear US economic outlook:
- US real GDP: 2.3% in 2026, 2.6% in 2027; base case requires gradual Middle East de-escalation, according to Morgan Stanley Research.
- Consumer spending: 1.8% in 2026, recovering to 2.1% in 2027; average tax refund of $320 neutralized by gas at $3.60/gallon, Morgan Stanley confirmed.
- Business investment: 7.0% in 2026, 8.0% in 2027; hyperscaler capex exceeds $1 trillion in 2027, according to Yahoo Finance.
- Inflation: core PCE 2.8% in 2026, 2.3% in 2027; headline PCE peaks at 3.9% in May 2026 before declining, Morgan Stanley noted.
- Fed policy: on hold through end of 2026; 50 basis points of cuts in 2027 at March and June meetings; terminal rate 3.0% to 3.25%, Morgan Stanley confirmed.
- Oil downside scenario: Brent surges to $140 to $160 per barrel, pushing global economy into recession through supply shortages and demand destruction, Morgan Stanley noted.
The Fed, Kevin Warsh, and what the rate path means for investors
Morgan Stanley sees the Fed on hold at 3.50% to 3.75% through the end of 2026, followed by 50 basis points of cuts in 2027, bringing the terminal rate to 3.0% to 3.25%. “The bar for rate cuts has risen,” the report states plainly, as policymakers remain wary of inflation persistence and the risk of additional energy supply shocks.
The report also flagged a potential “regime shift” under incoming Fed Chair Kevin Warsh. A Warsh-led Fed may communicate less publicly, creating more short-term policy uncertainty for markets. Balance sheet policy comes up for debate, though any changes require consensus, regulatory reform, and time, Morgan Stanley noted.
The bank published four alternative scenarios alongside the base case, ranging from an aggregate demand upside where the oil shock fades and the Fed hikes in 2027, to a global recession scenario where Brent surges to $140 to $160 per barrel through the third quarter of 2026. Each scenario is plausible. The outcome depends on a diplomatic process that neither economists nor markets can reliably forecast. What Morgan Stanley is confident about is the structural direction: the US economy is operating under a different set of rules than the decade investors spent after 2008 learning them. How long AI spending can offset a weakening consumer is the defining question of the second half of 2026.