Economic outlook: Investment-led growth in a higher-rate world

Wells Fargo Research Team Wells Fargo

Key Themes

The growth picture reflected in this forecast update is a bit brighter than our September outlook. Our Q3 GDP forecast is now 3.2% thanks in part to resilient consumer spending and firm capex investment. We forecast full-year GDP growth of 2.4% for 2026 relative to just 2.2% in our September update.
The AI build-out continues to drive business fixed investment. A trend strengthening in imports of computer and electronics products points to stronger equipment spending in Q3, even as it implies a slightly larger drag from trade during the period. Further out in the forecast, we look for both equipment and intellectual property spending to continue to expand, albeit not at the double-digit pace seen this year.
A hot September CPI report was another stumbling block on the path back to 2% inflation. Chair Warsh's hawkish comments about getting inflation down would seem to suggest another hike in October is on the table. Yet, a wave of dovish Fed speak in recent weeks seemed designed to drive home that October would be a hold. Our sense is that the hot September CPI print is not quite enough to compel the FOMC to move at the October 28 meeting, but clearly the meeting could be live, and the recent data increases our conviction in a December rate hike.

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