2026 economic outlook

Raymond James Chief Economist Eugenio J. Alemán evaluates economic conditions heading into 2026. 

One of the biggest risks the US economy faced in 2025 was the uncertainty brought about by the Trump administration’s implementation of tariffs. But high tariff uncertainty was counterbalanced by an impressively strong surge in investment in data centers linked to the AI-driven burst that kept the economy from going under.

The environment for 2026 will be more certain in many ways, as some of the Trump administration’s new policies will be behind us while others are expected to boost economic growth. We expect the economy to have a good year in 2026 although, as always, there will be plenty of risks. For the most part, some parts of the One Big Beautiful Bill Act (OBBBA), which includes some front-loaded fiscal stimulus, will support economic activity during the year.

Economic growth 

We project the economy will grow by 2.2% during 2026 and by 2.3% in 2027. Growth in 2026 will be the consequence of some of the provisions of the OBBBA, which will subsidize investment through accelerated depreciation. This has the potential, together with sustained AI-driven investment, to keep real investment in the economy strong. Although we don’t expect the recent increase in AI investments to accelerate further going forward, we do expect it to remain relatively strong and supportive of the overall strength in real investment during the next several quarters. While we don’t expect a robust rebound in residential investment, we anticipate a modest uptick driven by slightly lower mortgage rates compared to 2025. Our expectation for lower mortgage interest rates next year is based on a steady disinflationary process once the effects of tariffs are out of the system.

The advanced purchase of durable goods in 2025 due to the increase in tariffs will continue to keep growth in durable goods limited during 2026. At the same time, we don’t see much growth coming from discretionary consumption, especially if income growth remains constrained by a weak labor market.

Employment and income growth

We do not see employment improving markedly during 2026 and thus, incomes as well as consumer demand will remain challenged compared to the last several years. Furthermore, we do not see large employment losses and expect the rate of unemployment to remain relatively low and thus supportive of growth in consumer demand.

The Trump administration’s immigration policies are going to continue to put pressure on the availability of workers. However, these pressures are not going to be homogeneous across sectors. Although AI investment has the potential to reduce the need for workers in several industries (due to an increase in productivity from workers applying AI on their jobs plus the elimination of some jobs due to automatization) there are sectors that benefit much less from the AI-productivity revolution. Sectors such as construction, leisure and hospitality, and retail, just to mention a few, are going to continue to struggle to find workers.

Although one of the reasons for the crackdown on immigration is supposed benefits to American workers, it is highly unlikely that American workers would take the jobs that these groups of immigrants perform, likely due to low wages and poor working conditions. Furthermore, the reduction in immigration as well as the increase in deportations means that those individuals will not be consuming, will not be renting, etc., and thus firms will not have to hire more workers to support higher consumption coming from these sectors of the economy.

Inflation 

We expect inflation to be somewhat sticky during the whole of 2026 and remain above the Federal Reserve’s (Fed) target as we expect more pressures coming from the effects of increased tariffs. While we still believe the disinflationary process will remain in place, excluding the effects of tariffs, above-potential economic growth will limit the ability for inflation to come down faster. That is, we expect the underlying disinflationary process to remain in place, supported by further declines in shelter costs and very little pricing pressure from the services side of the economy. We were expecting shelter costs to continue to support the disinflationary process, but the process is expected to accelerate later in the year because of lower demand for housing as a result of the slowdown in immigration, plus the effects of increased deportation.

Federal Reserve and interest rates 

Within this environment of higher economic growth, less supply as well as demand for labor, positive but relatively weak consumer demand growth compared to the recent past, a relatively strong investment profile, especially from the non-residential investment side of the economy, etc., we see little room for the Fed to lower interest rates more than once in 2026 because the Fed risks pushing economic growth even higher, which could generate higher inflation.

Risks to our forecast 

Non-residential investment related to AI has been carrying US economic growth as well as increased stock market valuations. Thus, a reversal in this important contributor to economic growth during 2026 could potentially derail economic activity.

Another concern is the potential erosion of Fed independence. Our forecasts assume both Fed independence and a willingness from investors to continue to finance US fiscal largesse; if these assumptions change, then we would need to revise our projections.

Bottom line 

Despite lingering tariff uncertainty and labor market constraints, 2026 is poised for solid growth, supported by OBBBA-driven fiscal stimulus and sustained AI investment. We forecast GDP growth of 2.2%, with inflation remaining above target and we expect more than one Fed rate cut in 2026. While known risks are mostly manageable, unknown shocks – geopolitical, financial, or policy-related – could still derail the outlook.

Economic and market conditions are subject to change.

Opinions are those of the Raymond James Chief Economist and are subject to change without notice. There is no assurance any of the trends mentioned will continue or forecasts will occur. Past performance may not be indicative of future results. “GDP” (Gross Domestic Product) is the annual total market value of all final goods and services produced domestically by the United States. Companies engaged in business related to the technology sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Investing in this sector is not suitable for all investors.