US Economic Outlook: 'Fragile Expansion' Masked by AI and Fed Uncertainty

The US economy is walking a tightrope. According to a sharp new analysis by UBS, the current expansion is dangerously narrow, resting almost entirely on the Artificial Intelligence investment cycle. With the underlying economy showing signs of strain, the risk of recession in the next 12 months has been pegged at 50%.

• Recession probability over the next 12 months estimated at 50%.
• AI equipment investment surged 17%; non-AI capex contracted by 1%.
• Tariff effective rates climbing toward 13%.
• Core financing costs (PCE) projected >3% through 2026.

The Narrow Breadth of Growth

UBS data highlights a “two-track” economy. While AI-related equipment investment has surged 17% over the last four quarters, non-AI capex has contracted by 1%.

Furthermore, consumption data is misleading; spending is being driven by the wealth effect in high-income households (tied to stock market gains), while the broader labor market shows signs of “chronic contraction” when healthcare hiring is stripped out.

Policy Crossroads: Tariffs and The Fed

Complicating the outlook is the return of tariffs, with effective rates climbing toward 13%—levels reminiscent of the 1930s. UBS warns this acts as a slow-moving supply shock, likely keeping core financing costs (PCE) stuck above 3% through 2026.

Simultaneously, FX markets are grappling with leadership uncertainty at the Federal Reserve. Rumors surfaced regarding the replacement of Chair Powell, with Kevin Warsh (seen as a hawk) gaining traction over Kevin Hassett (a dove) in prediction markets.

Technicals

• DXY: Caught between hawkish personnel shifts (Warsh) and recessionary data (UBS).
• Gold (XAU/USD): UBS notes a structural shift in gold demand, moving from a cyclical hedge to a necessary diversifier against US policy unpredictability and sticky inflation.