U.S. economy in a 'multi-dimensional' supply shock environment, says EY Parthenon's Chief Economist

Yields cautious up , medium term, interviewee explicit

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NDX cautious down , medium term, interviewee implicit

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EY-Parthenon 3.0
Management Consulting
Gregory Daco 9.0

U.S. economy in a 'multi-dimensional' supply shock environment, says EY Parthenon's Chief Economist

wti

our baseline case is that we see average oil prices on a Brent measure that slide down to around $85 in the third quarter and then further down towards $80 by year end Baseline assumes decline from current levels but acknowledges recent volatility with oil trading around $110 per barrel and downside risk scenarios where prices could remain elevated.

8/5/2025 6:58:39 PM	medium term up	20 days later	-1.71%	-1.71%

yields

we've seen pricing of fewer rate cuts by the Fed lead to upward pressure on long term rates. We've seen higher inflation expectations push higher long term rates. And we've also seen questions around fiscal sustainability and fed influence pressure long term rates higher. Inflation remains above 2% target with further inflationary pressures expected, Fed likely on hold, creating upward pressure on yields despite geopolitical conflict that would normally push yields down.

Introduces Gregory Daco and asks about stagflationary winds, growth rate, and inflation pace.

speaker1
Gregory Daco

We are in a multi-dimensional shock environment with confluence of supply shocks. Anticipating U.S. growth to decelerate to around 1.5% by year-end with inflation rising towards 4% and ending around 3%, creating a stagflationary environment.

Not just one supply shock but trade shock, tariff shock, immigration shock, AI shock, and Middle East conflict all affecting US economy.
Notes 5%+ nominal GDP with 4 percentage points from inflation is uncomfortable, asks about Fed policy implications.

speaker1
Gregory Daco

Fed likely to hold for foreseeable future as inflation moves in wrong direction. March FOMC minutes had hawkish tilt focusing on inflation above 2% target.

Most Fed policymakers appear content with balanced labor market, though Daco sees downside labor market risks as dominant.
Asks about consumer fortunes given decent spending numbers but lagging real income growth.

speaker1
Gregory Daco

Consumers running on fumes with real disposable income growth at 1% while spending at 2.5%, dipping into savings and credit.

Tax refunds around $300 per household will be more than offset by $350 energy shock from Middle East conflict.
Asks what oil price assumptions are baked into growth and inflation projections.

speaker1
Gregory Daco

Baseline case: Brent oil slides to $85 in Q3 and $80 by year-end, still $15 higher than pre-conflict. Downside risk scenario could see inflation at 4.5-5% and growth below 1%.

Notes oil was recently trading around $110 per barrel, indicating significant volatility risk.
Asks about implications for yields, mortgage rates, and housing market.

speaker1
Gregory Daco

Unusual interest rate environment with upward pressure on long-term yields from fewer Fed rate cut expectations, higher inflation expectations, and fiscal sustainability questions.

Typically geopolitical conflicts see downward pressure on yields from safe haven flows, but not this time.

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