US economic outlook: February 2026

We have not made any significant changes to our economic growth forecast. Recent data reinforce our view that real GDP growth remains on a solidly positive trajectory, largely reflecting sturdy consumer spending and a strengthening rate of business investment. Looking ahead, we continue to foresee an above-consensus pace of real GDP growth for 2026 with expansionary fiscal policy, less restrictive monetary policy, robust AI investment and reduced economic policy uncertainty.

Labor market conditions remain far from energetic, yet recent months' data have shown signs of stabilization. Against a backdrop of solid economic growth, we continue to see a modest pick-up in hiring as the year progresses and look for nonfarm payroll growth to average 70K per month in 2026. Firming job growth should help to keep the jobs market roughly in balance and leave the unemployment rate at 4.3% in Q4-2026.

The inflation data continue to come in somewhat cooler than expected as moderating services prices partially offset a tariff-related lift to goods costs. We suspect the inflationary impulse from tariffs has yet to transmit fully through supply chains and forecast the core PCE deflator to tick up to 2.9% year-over-year in Q1. Further out, we look for a disinflationary trend to resume and anticipate the average year-over-year rate on the core PCE deflator to fall to 2.6% in Q4-2026 and 2.3% in Q4-2027.

We have made a minor change to our monetary policy outlook. In our view, the recent stabilization in the labor market significantly lowers the likelihood of a March rate cut. However, additional cuts later this year are still on the table given the more benign inflation outlook. We still see two more 25 bps cuts this year, but now look for the reductions to occur at the June and September FOMC meetings. Given our generally constructive forecasts for the labor market and inflation, we acknowledge the balance of risks remain tilted toward fewer rate reductions this year.

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