Artificial Intelligence Spending Is Propping Up the U.S. Economy, Morgan Stanley Warns

Key Takeaways

• Morgan Stanley’s latest economic report emphasizes “Capex Over Consumption,” highlighting AI’s critical role in sustaining growth
• Projected U.S. GDP expansion of 2.3% in 2026, with recession avoided in the baseline scenario
• Rising energy prices are nullifying the $320 average tax benefit from the One Big Beautiful Bill Act
• Federal Reserve projected to maintain current rates until 2027, with first cuts anticipated in Q1
• Potential Fed leadership change to Kevin Warsh may reduce transparency and increase market volatility

Lead U.S. Economist Michael Gapen, along with his research team, maintains that a recession is not on the horizon. However, their analysis reveals an economy marked by significant disparities.

Business investment in artificial intelligence technology is providing the primary momentum. At the same time, American households face mounting pressure from escalating energy expenses.

Economic Expansion Projections Amid Oil Market Turbulence

The investment bank anticipates U.S. real GDP will expand by 2.3% throughout 2026, followed by 2.6% growth in 2027. This projection operates under the assumption that Middle Eastern geopolitical tensions will gradually subside.

Morgan Stanley characterizes the recent oil price spike as the fourth significant supply disruption to impact the American economy in the past several years. The prior three shocks included the coronavirus pandemic, the conflict between Russia and Ukraine, and tariff-related disruptions in 2025.

Brent crude traded near $70 per barrel in February’s opening weeks. Since then, prices have fluctuated within a $90 to $120 range. The bank’s central scenario projects oil stabilizing between $80 and $90 throughout the remainder of 2026.

Energy Price Surge Undermines Household Budgets

Consumer expenditure growth is projected to decelerate to 1.8% in 2026, a decline from 2.1% recorded in 2025.

While the One Big Beautiful Bill Act delivered approximately $320 in additional tax refunds per household—representing a 17% annual increase—Morgan Stanley’s analysis shows this benefit vanishes entirely if retail gasoline prices average $3.60 per gallon.

Real wage income is anticipated to advance merely 0.8% during 2026. The burden falls disproportionately on lower and middle-class families, who allocate larger portions of their income toward energy expenditures.

Corporate Technology Investment Compensates for Weak Demand

As household spending contracts, business investment is expanding to fill the void. Morgan Stanley projects nonresidential fixed business investment will grow 7.0% in 2026 and accelerate to 8.0% in 2027.

The five dominant cloud computing giants—Amazon, Alphabet, Meta, Microsoft, and Oracle—are anticipated to deploy approximately $805 billion in capital investments during 2026. This figure is forecast to surpass $1 trillion the following year.

Morgan Stanley categorizes AI-related capital expenditure as structural rather than cyclical in nature. These investments are expected to continue regardless of oil market fluctuations or consumer confidence levels.

Research conducted by the firm indicates AI-driven job displacement has elevated the unemployment rate by no more than 0.1 percentage point. Industries with high AI adoption contributed 1.7 percentage points to the 2.4% productivity increase in nonfarm businesses during 2025.

Federal Reserve Policy Outlook and Leadership Transition

Morgan Stanley anticipates the Federal Reserve will maintain its benchmark rate at 3.50% to 3.75% throughout 2026. Two quarter-point reductions are forecast for March and June of 2027, establishing a final rate range between 3.0% and 3.25%.

The bank’s previous forecast called for rate cuts beginning in January 2027. That timeline has now been delayed.

Core PCE inflation is estimated at 2.8% for 2026, declining to 2.3% in 2027. Headline PCE is expected to reach its zenith at 3.9% in May 2026 before moderating.

The analysis also highlights potential implications of Kevin Warsh assuming the Fed Chair position. A Warsh-led central bank may adopt more restrained public communication, potentially generating near-term market instability.

Morgan Stanley presented four alternative economic scenarios. The most pessimistic envisions Brent crude surging to between $140 and $160 per barrel, triggering a worldwide recession.

April’s retail sales figures demonstrated weakness when adjusted for inflation, though upward revisions to February and March data suggest consumption may prove more resilient than initially expected. The bank indicated that the upcoming quarterly services survey could provide additional insight into economic momentum.

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