Resilient Growth Meets Rising Uncertainty

Key Takeaways

• The Economist Council’s growth outlook held steady at a solid 2.2% (Q4/Q4) for 2026 — unchanged from the second-half 2025 survey — even as half of respondents said their outlook had weakened this year and only 22% said it had improved.
• AI-related capital spending remains the top-cited upside risk to growth, while a correction in AI investment has emerged as the single largest downside risk, alongside geopolitical risk escalation, higher energy prices, and tighter monetary policy.
• Inflation forecasts moved higher on the back of rising energy prices, with headline PCE and CPI now expected to end 2026 at 3.5% and 3.4% (Q4/Q4), respectively — though 89% of respondents still see inflation expectations as well anchored.
• A majority of the Council expects incoming Federal Reserve Chair Kevin Warsh to bring meaningful changes to Fed policy and communications, including eliminating the dot plot and reducing the size and composition of the balance sheet.

The U.S. economic outlook has remained remarkably stable since our last 2H 2025 Economist Council survey, despite rapidly evolving shocks and underlying structural changes. From an AI investment boom that continues to overshadow a softening consumer to a resurgence of inflation tied to the Middle East conflict (in addition to a new Fed Chair poised to reshape monetary policy and communications) the latest SIFMA Economist Council survey forecasts an economy that remains resilient, but uneven.

Last week, SIFMA published the results of its SIFMA Economic Survey, Mid-Year 2026 and held a Member Briefing to discuss the findings. The SIFMA Economist Council brings together U.S. economists from more than 30 global and regional financial institutions. The survey assessed the current economic landscape, growth and recession risks, inflation and monetary policy, the labor market, fiscal policy, and more.

Below are some of our top takeaways from the survey:

Economic Growth: Resilient, But Uneven

• GDP Outlook Holds Steady: The overall growth outlook for 2026 held at 2.2% (Q4/Q4), unchanged from our last survey, as robust AI-driven business investment continues to overshadow a consumer contending with slower job growth, deteriorating real disposable income growth, and diminished personal savings. Strong stock market gains and bigger-than-normal income tax refunds likely helped revive real consumer spending growth in the second quarter, even as lower-income households struggled with rapidly rising energy prices and a resurgence of inflation tied to the Middle East conflict.
• Sentiment Mostly Softens: Half of survey participants said their 2026 outlook had weakened since the beginning of the year, most often citing the Middle East conflict, higher energy prices, and lower consumer spending; only 22% said their outlook had improved.
• AI Investment Reshapes Growth’s Composition: Q1 2026 GDP grew at an annualized 2.1%, matching the 2025 full-year pace, but the composition of that growth looked very different. Real spending on household services softened dramatically — outside of the COVID era, the steepest decline since the Global Financial Crisis. Investment tied to AI, cloud infrastructure, and semiconductor capacity more than made up the difference.
• AI CapEx Tops the List of Upside Risks: Survey participants pointed to a number of upside risks to growth, led by AI-related capital expenditures, along with lower energy prices and resilient consumer spending. Nonresidential fixed investment is now forecast at a robust 6.1% (Q4/Q4) in 2026, up from 5.6% in 2025.
• AI Bubble Tops the List of Downside Risks: Downside risks tied to trade policy, tariffs, and immigration have diminished since our last survey, replaced by rising concerns over a potential AI bubble, geopolitical risks, higher energy prices, and tighter monetary policy.

Inflation: Elevated, But Anchored

• Inflation Forecasts Move Higher: Given the spike in energy prices, the ongoing conflict in the Persian Gulf, and resilient domestic demand, forecasters marked up their 2026 forecasts for PCE and CPI inflation to 3.5% and 3.4% (Q4/Q4), respectively — more than half a percentage point higher than where inflation ended last year. Core PCE and CPI are also expected to end 2026 well above the Fed’s 2.0% target, at 3.2% and 2.9% (Q4/Q4), respectively, before moderating to a still-above-target 2.5% and 2.4% in 2027.
• Domestic Demand and Oil Prices Drive the Outlook: Growth in domestic demand, geopolitical conflict and oil prices, supply chain issues, and inflation expectations topped the list of factors shaping the Council’s core inflation outlook; concerns about tariffs and wage growth fell much further down the list.
• Expectations Remain Anchored: A majority of forecasters (56%) still expect core PCE inflation to moderate back to the Fed’s 2.0% target on its own accord, without a significant growth slowdown or additional monetary tightening needed — though 80% don’t see that happening before the first half of 2028 at the earliest. Despite the higher near-term forecasts, 89% of respondents expect inflation to remain anchored.

Labor Market: Stabilizing, But Structurally Tighter

• Payroll Growth Improves: Council members expect average monthly nonfarm payroll growth to run around 70,000 a month in 2026 and 47,000 a month in 2027, a measurable improvement from last year’s paltry 10,000-a-month average. That pace is close to economists’ estimate of breakeven job growth, where labor demand just balances labor supply, and should keep the U.S. unemployment rate steady at around 4.3% through 2027.
• Structural Forces Keep the Market Tight: An aging population, elevated retirements, and reduced immigration continue to constrain the economy’s available labor supply. That helps keep the unemployment rate lower than it otherwise would be during a period of slower hiring, but it also reduces potential economic growth and could contribute to labor shortages and upward pressure on wages. From a monetary policy perspective, a structurally tighter labor market complicates the Fed’s task of bringing inflation back to target without materially weakening employment.

Monetary Policy Under a New Fed Chair

• SIFMA Economist Council Forecasts No Cuts in 2026: Following three rate cuts in 2025, the Council sees no cuts in 2026, with the majority expecting one to two cuts in 2027.
• Few Expect a Fed Hike This Year: Only 22% think the Fed will hike the federal funds rate by year-end, and only 33% think the Fed should hike this year. Almost 2/3 of respondents believe a Fed hike that ends the equity market rally and sends long-end borrowing rates spiking poses a greater risk than no hike leading to accelerating inflation.
• Warsh Set to Reshape Fed Policy: Kevin Warsh was confirmed by the Senate in May 2026 and is now serving as the 17th chair of the Federal Reserve. A majority of the Council believes he will bring meaningful changes to Fed policy and communications: 78% expect the elimination of the dot plot, 67% expect a greater focus on trimmed mean inflation, 67% expect a reduction in the balance sheet, 61% expect less frequent post-FOMC press conferences, and 56% expect a change in the composition of the balance sheet.

Fiscal Policy: Deficit Skepticism Persists

• Concerns over the Deficit Remain: The Council remains highly skeptical that policymakers in Washington will manage to reduce the federal deficit as a share of GDP in 2026. 77% of respondents said they were very or somewhat doubtful the deficit would shrink this year, while just 6% expressed confidence that it would.
• Deficit Yield Impact Modest: Nearly all participants believe the impact on federal government financing costs is modest: 41% think the effect on the 10-year Treasury yield is 15 basis points or less, and 94% say it’s under 25 basis points.

Conclusion

The Economist Council generally sees a robust and resilient U.S. economic and labor market outlook through 2027— one that continues to run at or slightly above its potential. Developments regarding the AI investment boom, equity valuations, productivity, and labor market impacts loom large over the outlook. That said, it’s worth noting that a sizable share of respondents (61%) still placed the probability of a negative quarter of GDP growth over the coming year in an elevated 15% to 30% range, underscoring the uncertainty that persists in the economic outlook. By comparison, in the H2 2025 survey, 70% of respondents put that probability below 30%. The most often-cited reasons for a possible downturn among Council members were a sizable equity market decline (53%), weak payroll growth (24%), or a geopolitical event (18%).

For more information on SIFMA Research and the Economist Council, visit www.sifma.org/research.