United States: Sideways growth, sticky inflation – TD Securities

TD Securities projects US output growth to move sideways in 2026, slightly below trend, with Real Gross Domestic Product (GDP) at 2.0% Q4/Q4 and unemployment around 4.3%. The Iran conflict and an oil shock pose stagflationary risks, while AI and high-income consumers support demand. Core Consumer Price Index (CPI) is seen peaking near 3.0% year-on-year in Q4 2026, with disinflation resuming in 2027.

Sideways growth with stagflation risks

"We expect output growth to move sideways this year, reflecting the lingering impact of the oil shock. The Iran conflict presents stagflationary risks, which we expect will keep the Fed on hold for the entire year. AI and high-income consumers have supported underlying growth."

"GDP growth will likely remain slightly below trend in 2026, ending with 2.0% Q4/Q4. Stable growth should result in a still-low unemployment rate of 4.3% by Q4 2026. The labor market has signaled stabilization, and while we expect that to continue, rising input costs from the oil shock create further uncertainty that could weigh on hiring. We assign 25% odds to a US recession over the next year."

"With supply chains stressed, we do not see substantial disinflation as feasible this year. We expect core CPI inflation to peak at 3.0% y/y in Q4 2026, ending the year higher than it started. The numbers are similarly high in core PCE terms. Most of the impact of higher oil prices will filter into headline inflation. We look for gradual disinflation to resume in 2027."

"The outlook will be fluid amid uncertainty around developments in Iran and the Trump administration's execution of new trade, fiscal, regulatory, and immigration policies. New developments in financial markets and further escalation of geopolitical conflicts remain key risks for our economic projections over the forecast horizon."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)