The US economy continues to show resilience, with real gross domestic product (GDP) increasing by 2.1% from a year earlier in the second quarter. Domestic demand, specifically in private sector sales, grew even more robustly at 2.7%. This growth is largely attributed to business investments in artificial intelligence (AI) and the positive wealth effects stemming from rising equity prices.
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Despite an improved outlook for business investments and consumer spending, a slowdown in growth is anticipated over the next two years. Business investment is predicted to begin moderating by 2027, accompanied by a deceleration in consumer spending. Elevated inflation and increasing interest rates are expected to suppress both investment and consumer spending, with consumer expenditure growth having outpaced post-tax income growth for over two years.
The public sector may also create headwinds for growth as fiscal policies transition from supportive to contractionary due to the phasing out of certain tax credits. Additionally, international trade is unlikely to provide significant stimulus, impacted by modest global growth and ongoing trade tensions. Real GDP growth is expected to decline slightly from 2.1% in 2026 to 1.9% in 2028.
Looking further ahead, an acceleration in real GDP growth is anticipated beyond 2028, fueled by productivity improvements related to AI investments. As inflation decreases, interest rates are expected to follow suit, contributing further to economic growth. By 2031, real GDP growth is projected to rise to 2.3%, slightly higher than last year’s forecast of 2.2%.
In a downside scenario, if returns on AI investments fall short of expectations, businesses and consumers may shift towards more affordable models. This would potentially result in a 35% equity market correction, leading to a 12% decline in business investment over two years and increasing default rates on debt linked to AI financing. A consequent rise in the unemployment rate to 7.2% could restrain consumer spending, with real GDP growth slowing to 0.2% in 2027 and contracting by 1.2% in 2028.
As the U.S. Federal Reserve responds with interest rate cuts to stabilize the economy during a recession, recovery may be slower than in previous downturns due to limited fiscal stimulus and heightened inflation concerns. Unlike prior innovation cycles, the capital invested in the U.S. may not provide lasting benefits, with foreign competitors capturing a greater share of the market.
Conversely, an upside scenario anticipates lower average tariff rates, geopolitical tensions easing, and stable oil prices. Stronger net migration could result in a population increase, further bolstering business investment fueled by AI-related activities. This scenario may yield faster real wage growth and a maintained unemployment rate below the baseline. While investment may remain uneven across sectors, lower tariffs and oil prices are expected to help keep inflation in check, leading to unchanged interest rates until early 2028.