U.S. Economy Shows Strength Amid International Conflicts and Rising Inflation

Leading this expansion were the transportation, utilities, and information and communication sectors, as well as solid gains in finance, insurance, real estate, and services. High-frequency indicators suggest that business activity momentum continued into October.

Employment rose in half of the sectors, further demonstrating the strength of supply-side activity despite challenging economic conditions. Although households have yet to feel significant affordability pressures, businesses are increasingly wary of rising energy costs linked to the ongoing conflict in the Middle East.

Consumer spending remains strong, and business investment is accelerating, particularly in artificial intelligence. The full impact of rising energy prices is not yet felt, but risks are beginning to mount.

Real GDP growth is projected at 2.3% in 2026, consistent with 2025, with an expectation of improvement to 2.4% in the ensuing years. Inflation, influenced by energy effects from Middle East conflicts and tariffs, is expected to average 3.3% this year, an increase from 2.7% in 2025 but lower than 4.1% in 2023 and 8.0% in 2022. This remains above the Federal Reserve’s 2.0% target, alongside high U.S. fiscal deficits and surging energy prices, contributing to elevated interest rates, including the 10-year Treasury yield.

The ISM U.S. Manufacturing Purchasing Managers Index for September recorded a reading of 54.5, indicating expansion for the ninth consecutive month, with production and new orders showing overall positive trends. Meanwhile, the ISM U.S. Services PMI stood at 54.9 in September, marking 27 months in expansionary territory, affirming a resilient economy.

The housing market continues to face affordability challenges, as home values remain high and 30-year fixed mortgage rates approach 7.5%. Builder confidence is low, and September housing starts declined to an annualized rate of 1.22 million, down 7.4% from last year. Projections suggest total U.S. housing starts may decrease to 1.34 million in 2026, improving slightly to 1.37 million in 2027, both figures below the 1.60 million needed to address the housing shortage. Significant improvements in affordability would require mortgage rates to fall below 6.0%.

In the automotive sector, U.S. light vehicle sales were strong in the second quarter, boosted by tax returns and electric vehicle sales, but retreated in the third quarter due to inflation affecting consumer incomes and high vehicle prices. Sales are projected to reach 16.2 million vehicles this year, with potential growth to 17.3 million by 2027, approaching levels seen in 2018.

Retail sales showed improvement despite lower consumer confidence, supported by healthy household balance sheets among affluent consumers and manageable debt levels. However, consumer spending remains sensitive to labor market trends, with a modest outlook for future growth.

Fixed business investment has become the primary growth driver, with positive new orders for capital goods reflecting increases in AI-related investments. Business investment appears broader as deferred productivity projects and reshoring initiatives advance, many incorporating significant chemistry content that could sustain demand growth.

Manufacturing PMIs across the Americas showed mixed results, with positive indicators in Canada and Mexico and a slight decline in Brazil. European factory activity remained robust in September, alongside growth in China, Japan, South Korea, and other major Asian exporters, driven by the expansion of AI infrastructure.

Source: IndexBox Market Intelligence Platform.