Savannah Chamber

7 National Outlook 2026 Jeffrey M. Humphreys, Selig Center Director Selig Center for Economic Growth Terry College of Business The University of Georgia Our national forecast for the coming year is sobering. Data show that protectionist trade policies will blunt U.S. economic growth to a meagre 1.3 percent (barely above a stall) in 2026. The slowdown in job growth is even more pronounced: it will be nearly at a standstill from mid-2025 through the end of 2026, with the unemployment rate topping out at 4.7 percent. (The unemployment rate would be higher if not for the lack of labor force growth.) A slow rise in unemployment will not be enough to trigger a pullback in consumer spending, but a faster than expected increase in the unemployment rate is likely to trigger recession. In 2026, consumer price inflation will be about 3.5 percent, which is higher than the 3 percent rate estimated for 2025. With recession risks running high, the Federal Reserve will ease monetary policy even though the inflation rate will be higher than it would prefer. It's willing to do this because of recent success in bringing down the inflation rate from 8 percent in 2022 to 3 percent in 2025; a soft labor market; a high—49 percent—risk of recession; and an understanding that tariffs provide a one-time push to inflation that fades once incorporated into the costs of doing business. Tariffs alone do not generate runaway inflation. So, in 2026, the Federal Reserve will focus more on supporting the labor market and less on containing inflation. We expect additional cuts in short-term policy interest rates, lowering the federal funds rate to 3 percent. We also expect quantitative tightening to end. Barring an unexpected shock, the recent and continuing shift from tight money towards easy money is likely to forestall a recession, but it will be close. If a recession develops, the Fed probably will lower the federal funds rate to below 3 percent with the leeway to ease more aggressively. The government sector will contribute slightly to the U.S. economic growth thanks to the One Big Beautiful Bill Act and its supportive federal fiscal policies. Federal defense spending will rise substantially, and federal nondefense spending will rise slightly, but federal civilian employment will decline. One risk, however, is that treasury rates may surge. Bond market participants may insist on higher compensation for increased debt issuance. A gradual loss of faith in the Federal Reserve and/or the U.S. Treasury market as a haven for capital would drive up yields. That outcome would precipitate a fiscal crisis for the U.S. government and tighten credit conditions for all borrowers, triggering a recession. We expect state and local governments to spend slightly less in 2026 due to concerns about slower revenue growth and less federal support for programs. We also expect the number of local government jobs to increase slightly due to larger property tax digests. In contrast, we expect the number of state government jobs to drop, but we do not expect mass layoffs. In addition to lower short-term interest rates and more federal spending, our baseline forecast depends on the good financial position of households, a resilient labor market, and solid spending on intellectual property to support the post- pandemic economic expansion. Statistically, consumer spending is the main driver of the U.S. economy and will make the largest contribution to GDP growth in 2026. We expect inflation-adjusted consumer spending to grow by about 1 percent, thanks to a resilient labor market. Businesses will contribute to GDP growth, too. We project corporate spending on intellectual property to increase due to slightly more certainty about tariffs and other trade policies. High-tech investment in AI will be a bright spot. Spending on equipment will hold steady, or increase slightly, buoyed by the solid balance sheets of many businesses and less uncertainty on trade policies. Spending on buildings will decline but would be worse if spending levels were not depressed already.

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