US Outlook 2026: Balancing Accelerating Growth and Sticky Inflation

Growth in 2025 has been resilient despite a substantial drag from trade and immigration policy. Now these headwinds are abating at the same time fiscal and monetary policy are becoming stimulative. We expect a fourth consecutive year of above-trend GDP growth, with Q4/Q4 real GDP averaging 2.4% in 2026.

Easing Headwinds

The global trade war has de-escalated in recent months, and we expect easing to continue into 2026.

Despite occasional flare-ups, recent tariff announcements have been relatively benign. Country-specific tariff rates continue trending lower, and the Trump administration is increasingly offering exemptions for specific products. Notable exemptions for agricultural products and the Potential Tariff Adjustments for Aligned Partners (PTAAP) exclusion list suggest the administration is opportunistically rolling back tariffs to ease inflationary impacts.

Tariffs themselves have been a headwind to growth, but in our view, the larger drag came from uncertainty, which weighed on business sentiment and had a chilling effect on capex. Measures of trade uncertainty remain elevated but have moderated significantly since peaking around Q2. Surveys and anecdotes suggest business confidence has stabilized along with greater clarity on an end-game for trade policy

Policy Stimulus

As headwinds from the trade war ease, fiscal and monetary policy are also becoming increasingly stimulative.

The One Big Beautiful Bill Act (OBBBA), which was passed in July, included front-loaded fiscal stimulus. Accelerated depreciation allowances have gone into effect, and we believe this has already begun to boost business investment. Personal income tax cuts are likely to lead to larger tax refunds in February and March 2026.

Strong Capex Fundamentals

Business balance sheets remain healthy, which should support a reacceleration in spending. Despite years of above-trend growth, business debt has actually declined as a share of nominal GDP. Debt payments also appear manageable. The aggregate interest coverage ratio for the business sector remains historically elevated.

Businesses have underinvested in recent years, which suggests there could be pent-up spending, as trade uncertainty fades and financial conditions become accommodative.

The recent underperformance in non-AI capex is especially surprising, given strong business profitability. Along with healthy balance sheets and tax stimulus, strong cashflows and earnings will likely support a reacceleration in business spending in 2026.

Green Shoots for Capex

Lead indicators point to a firming trend for investment, which should become increasingly evident in 2026. Survey measures of capex expectations rebounded after a sharp drop during the Liberation Day trade shock in Q2. Factory data show new orders for capital goods have also picked up.

Bank lending also appears to be gaining momentum. C&I loan growth has turned positive after several years of stagnation. The latest Fed Senior Loan Officer Opinion Survey also shows a pickup in demand for C&I loans.

The Consumer Remains Resilient

Consumer spending was surprisingly strong in 2025, at least in part due to a front-loading of purchases ahead of tariff price increases. This will likely lead to some negative payback beginning in Q4 2025 and continuing through early 2026.

That said, the underlying trend for consumption growth is likely to remain robust. We expect disposable income growth to accelerate modestly, boosted by steady wage growth, a pickup in employment, and income tax cuts from the OBBBA. Inflation is likely to moderate from a peak early in 2026, which should provide additional support to real consumption.

Like the business sector, household balance sheets remain healthy. Household debt has trended lower as a share of disposable income, with mortgages continuing to account for around 70% of the total debt balance. Household debt service costs remain below pre-pandemic levels as a share of income.

There have been pockets of stress for household finances, but in our view, this is primarily a normalization following benign credit conditions and extreme labor market strength in 2021-22. Credit card delinquency rates have picked up significantly since 2022, but the rate of newly delinquent borrowers has leveled off in recent quarters. The Fed’s Financial Stability Report suggests this increase in delinquencies was largely a one-off adjustment reflecting past underwriting standards, rather than a sign of emerging economic pressure. Student loan delinquencies also surged in 2025, but this was a widely expected normalization following the end of pandemic-era forbearance.

Spotlight: AI – ​​​​​​Measuring the economic impact of the new technology

AI’s contribution to growth in 2025: Small yet significant

AI was a meaningful driver of growth in 2025, though its impact appears weaker after accounting for trade dynamics. AI-related investments cannot be viewed in isolation from the surge in AI-related equipment imports, partly driven by tariff frontrunning, which mechanically weighed on GDP. Excluding this import drag, domestic AI investments made a smaller – but clearly positive and significant – contribution to growth, supported by installation activity, data center buildouts, software development, and rising own-account R&D.

AI’s growth contribution is likely to be materially larger in 2026

• Hyperscaler capex: Major firms are guiding to another steep ramp-up in AI spending (Fig. 19), with 2025 commitments set to be realized in 2026. Even adjusting for imports, domestic capex – GPU cluster installation, networking upgrades, data center assembly, electrical infrastructure, etc. – should show up more visibly in GDP.

• Structures catch-up: Despite widespread announcements, nonresidential structures investment remains soft relative to the data center pipeline. Trade agreements, chipmaker reshoring plans, and OBBBA provisions (accelerated depreciation, faster permitting, expanded credits) point to a large rise in AI-related construction.

• Power infrastructure: Electricity generation and grid capacity remain binding constraints. Both public and private electricity capacity installations have lagged hyperscalers’ demands. Utilities are now planning major expansions, implying a multi-year upswing in power-sector capex, supported by improving financing conditions and a deregulation-focused policy environment.

• Ancillary sectors: Cooling systems, thermal management, rare earth materials, batteries, and advanced manufacturing tied to chips and power electronics are also entering a new AI-linked capex cycle. Recent trade agreements and investments by the administration have triggered new factory construction commitments, many of which will commence in 2026.

The Labor Market is Rebounding

Solid growth and easing supply constraints are likely to drive a rebound in labor data. The unemployment rate is likely to reverse some of its recent increase, declining to 4.0% by year-end 2026.

Most of the slowdown in job gains since 2024 has been due to labor supply constraints. Immigration policy is likely to remain restrictive, but the impact on labor supply was particularly acute in H2 2025, and we think this headwind has peaked.

Hiring and labor demand continued to cool through 2025, but there are tentative signs of stabilization. A cyclical growth reacceleration will likely be a tailwind for labor demand in 2026, pushing the unemployment rate lower.

We expect layoffs to remain subdued near historical lows. Supportive financial conditions and solid growth will likely prevent businesses from running into liquidity or credit stress, which is often a precursor to shedding workers. There have been several high-profile announcements of businesses laying off workers due to AI-related efficiency gains, but the magnitude of these announcements has been modest relative to the regular pace of churn in the labor market.

Looking beyond near-term cyclical developments, we see evidence of a structural increase in trend wage growth. Apart from the stickiness in realized wage growth, business surveys suggest higher wage expectations have persisted even as the labor market has become less tight. Fundamentally, strong growth in nominal GDP and productivity suggests businesses have greater capacity to support pay increases than before the pandemic.

We doubt AI will be disruptive on a scale that impedes a cyclical job recovery. Business surveys suggest the impact of AI on labor markets has been modest so far. Looking ahead, generative AI could be more labor-saving than past technological advancements, raising the risk of employment disruption. However, in the long term, new technologies could boost demand, or even generate entirely new types of goods, services, and employment.

We Expect Inflation to Moderate

We expect core PCE inflation to decelerate gradually to 2.5% y-o-y by the end of 2026 from 2.8% as of September 2025. Most of this slowdown will likely be due to the fading impact of tariffs. The underlying trend for core PCE services will likely remain elevated, preventing a sustainable return to the Fed's 2% inflation target.

The main driver of our anticipated moderation is goods prices. Core goods prices diverged from import prices this year, probably due to higher tariffs. We estimate the tariff impact corresponds to a 0.4pp increase in the core PCE price index and expect the tariff pass-through to peak in Q1 2026, as automakers and retailers pass tariff costs on to their customers during the holiday season. The recent trade de-escalation should begin to weigh on goods prices starting in Q2 2026.

The pace of disinflation for service prices is likely to be more gradual though.

Supercore services inflation (core PCE services excluding rents and OER) remains well above its pre-pandemic run rate. There has been some progress this year, but this has been driven almost entirely by noisy components with little sensitivity to labor markets.

The most labor-sensitive components within supercore PCE have trended sideways for over a year, consistent with wage growth leveling off at around 4%. With the labor market likely to accelerate next year, we are skeptical there will be sustainable disinflation in supercore services.

We think rent disinflation will likely be gradual. Although new lease rent inflation (market rents) has decelerated to below pre-pandemic levels, residents’ decreasing mobility suggests the translation from market rents into existing lease rents will be slower than it has been historically. Moreover, resilient single-family rent inflation and changes in the structure weightings in owners’ equivalent rent (OER) calculation point to stickier OER inflation than regular rent inflation.

There is little evidence that the post-pandemic surge in immigration pushed up rent inflation. Consequently, we believe a slowdown in immigration is unlikely to weigh materially on rent inflation.

Fed Policy: Procyclical Easing

We expect the Fed to deliver two 25bp rate cuts in 2026, at the June and September meetings.

Our forecast for cuts next year is driven by changing Fed leadership, rather than our macro outlook. Our forecast for improving growth and elevated inflation would typically be consistent with hawkish Fed policy. However, a Trump-appointed Fed chair will likely be motivated to cut. The chair cannot set policy unilaterally, but we expect there will be at least some opportunity to ease next year.

Even as some officials pushed back against a cut in December, a majority retain some easing bias. The December minutes suggested “most” officials believe further rate cuts will be appropriate.

Cooling inflation momentum is likely to provide an opportunity to continue the easing cycle. Even though we do not expect inflation to return sustainably to 2%, there likely will be disinflation in both core goods and services. Some hawkish officials have made clear that they support additional easing, but would prefer to cut rates when inflation is falling, which suggests there could be broader support for easing once the impact from tariffs has peaked.