U.S. outlook for 2026

Kyle J. Anderson

Clinical Assistant Professor of Business Economics and Public Policy, Kelley School of Business

R. Andrew Butters

Associate Professor of Business Economics and Public Policy, Blanche “Peg” Philpott Fellow, Kelley School of Business

Recent developments in the U.S. and global economy present a complex and evolving picture for policymakers and business leaders. While our current readings of headline growth remain resilient — buoyed by strong investment in artificial intelligence, a resilient consumer and robust financial markets — underlying indicators suggest a more nuanced reality.¹ Labor market momentum is softening, with slower payroll gains and rising concerns about hiring reluctance amid political and economic uncertainty. Moreover, a divergence amongst households driving the resilience in consumption suggests more widespread weakness.

Inflation remains above target, though recent data suggest these pressures may be moderating. Meanwhile, the Federal Reserve has signaled the “rising downside risks to employment [shifting its] assessment of the balance of risks” between its dual mandates of price stability and full employment.

Globally, the IMF has revised down its growth forecast, citing risks from more restrictive trade policies, elevated debt levels and eroding central bank independence. These dynamics underscore the importance of agility and vigilance as firms navigate a fragmented and uncertain economic environment.

The Indiana Business Research Center forecasts real GDP to grow at 1.8% in 2026, with unemployment rising to 4.8% and inflation continuing its trajectory to 2%, albeit slowly. This forecast reflects an economy that has proven more resilient than many gave it credit for, but an economy fragile enough to warrant careful attention to potential inflection points.

When two wrongs can make a right

For 2025, our department’s forecast anticipated a gradual deceleration in U.S. real GDP growth — from 2.24% in Q4 2024 to 2.09% by Q4 2025 (see Figure 1). However, the path that materialized was more volatile: a contraction of -0.65% in Q1 2025 was followed by a strong rebound to 3.84% in Q2. Much of this volatility can be attributed to dramatic swings in the contribution of net exports to GDP growth, reflecting shifting global demand, trade policy uncertainty and inventory adjustments.

Figure 1: Quarterly U.S. real GDP growth

Note: Data is quarter-over-quarter growth.
Source: St. Louis FRED (https://fred.stlouisfed.org/series/GDPC1) and authors’ calculations

So, while our modest projection for 2025 has been shown to be both overly optimistic (in the case of Q1) and pessimistic (in the case of Q2), in terms of where we are likely to close out the year, our forecast for the economy was fairly accurate. Over the last four quarters we have data (2024 Q3 to 2025 Q2), the economy grew an average of 2.09% compared to our forecast of 2.38%, and did not fall into a recession despite many others forecasting it would.

Looking ahead, we see the possibility of similar “misses” to manifest in our forecasts for the coming year. As we outline briefly below, there are signs of both strength (particularly in AI investment) and weakness (increasingly as it relates to the labor market). Combine this bifurcated nature of the economy with a still considerable degree of uncertainty surrounding trade, fiscal and monetary policy and this creates an elevated possibility of volatility.  

Investment

Business fixed investment is another component of economic activity that has shown strength and volatility over the past year (see Figure 2), driven in large part by a surge in spending on artificial intelligence infrastructure. Firms across sectors have ramped up capital expenditures on data centers, specialized chips and cloud capacity. This wave of investment has supported GDP growth and helped offset weakness in other areas of the economy, such as residential investment.

Figure 2: Quarterly U.S. real private nonresidential fixed investment growth

Note: Data is quarter-over-quarter growth.
Source: St. Louis FRED (https://fred.stlouisfed.org/series/PNFIC1) and authors’ calculations

However, the scale and speed of AI-related capital flows have sparked growing debate over the sustainability of this boom. Some analysts and policymakers have raised concerns about a potential bubble, drawing parallels to the dot-com era. While many AI firms are generating substantial revenues, others rely heavily on speculative funding and face uncertain returns. As one Federal Reserve official noted, the current wave may represent a “productive bubble,” where even if investor expectations are not fully met, the resulting infrastructure could yield long-term benefits. Still, the concentration of investment and market valuations in a handful of tech giants has heightened the risk of volatility should sentiment shift.

Labor market

Following several years of high demand for labor, the economy has slowed significantly for workers. Job gains have averaged 75,000 jobs per month (compared to 167,000 in 2024). Some labor market weakness is to be expected given contractions in supply induced by less immigration and an aging workforce. However, we forecast the level of job creation in 2026 is unlikely to be sufficient to keep the unemployment rate from rising (see Figure 3).

Figure 3: Quarterly U.S. unemployment rate

Source: St. Louis FRED (https://fred.stlouisfed.org/series/UNRATE) and authors’ calculations

One notable trend over the past year has been the steady decline in the ratio of job openings to unemployed persons — a key indicator of labor market tightness (see Figure 4). After peaking well above historical norms during the post-pandemic recovery, this ratio has gradually approached 1.0, suggesting that the number of available jobs is now more in line with the number of job seekers.

Figure 4: Quarterly U.S. job openings to unemployed persons ratio

Source: St. Louis FRED (https://fred.stlouisfed.org/series/JTSJOL and https://fred.stlouisfed.org/series/UNEMPLOY) and authors’ calculations

This convergence is often interpreted as a sign that the labor market is moving toward equilibrium. While not necessarily indicative of weakness, it does reflect a normalization of hiring conditions and a potential easing of wage pressures. For employers, this shift may reduce the urgency and cost of recruitment, while for policymakers, it signals progress toward a more balanced labor market, albeit one still subject to broader economic uncertainties.

Trade policy

Uncertainty surrounding trade policy continues to be a headwind and is expected to continue at least over the very near term. Shifting rates and policies make it difficult for large-scale business investment. Latest estimates by the Congressional Budget Office (CBO) estimate the current effective tariff rate for the U.S. is about 16.5%, which reflects a 14-percentage point increase from a year ago. Companies have managed to absorb some cost increases, but we expect they will be less likely to do so as tariffs become permanent. Further, the CBO cites potential legal challenges related to the imposition of the tariffs (including a pending case in front of the Supreme Court), which is likely to further contribute to the uncertainty around the trade environment.

Conclusion

As we look ahead, the economic landscape remains marked by a delicate balance of resilience and risk. While technological investment and easing monetary policy offer reasons for cautious optimism, the developing softness in labor market indicators and the constantly evolving stance of trade and fiscal policy underscore the need for maintained vigilance.

While our outlook for 2026 resembles one of a subdued path of economic activity, there are several factors that could generate another year of increased volatility. If the labor market continues to weaken (more than our forecast), or for that matter crack, it would be unlikely that the resilience of the consumer would continue. This would very likely push our forecast — one that avoids a recession in 2026 — to be tipped into another business cycle.