Savannah Chamber

8 If our forecast for 1.3 percent GDP growth holds, then for the second straight year, the pace of growth will be below the economy's potential rate of growth of approximately 2 percent. The U.S. economy also is vulnerable to something else going wrong. Other recession triggers include: a more intense global trade war; mass layoffs; a Federal Reserve mistake; an asset market crash; a bond market meltdown; the bank and/or nonbank system freezes; and consumer spending col- lapses as people lose faith in the economy. Oil price shocks are a perennial threat, but we believe this risk is lower than usual due to ample supplies and spare capacity that could be brought online if tensions flare in the Middle East or if additional sanctions are imposed on major oil-producing countries. The recent shift to more restrictive U.S. immigration policies will slow economic growth, too. We expect net foreign immigration to be slightly negative, but unless deportations are truly massive, the shift will be an eco- nomic headwind, not a recession trigger. In addition, three fundamental economic imbalances increase the risk of recession: annual federal budget deficits that exceed 6 percent of GDP; overvalued housing markets; and overvalued equities markets. We foresee a 49 percent prob- ability of a recession beginning in 2026, which is higher than the 25 percent risk we estimated at this time last year, and more than triple the typical 15 percent recession risk. The main elements are the same as last year, but the risk of reces- sion is higher in 2026 because U.S. economy has lost some momentum. International Trade Protectionist trade policies will be prevalent globally as well. We expect trade tensions will remain high and most existing tariffs will remain in place. We assume the effective tariff rate on imports will be approximately 15 percent, which is six times higher than the 2.5 percent effective rate at the beginning of 2025. On balance, we believe that the net positive and negative effects of this will curb the pace of economic growth in 2026. The higher tariffs will be a substantial economic headwind, but we don't think that it will not be high enough to trigger a U.S. recession on its own. Uncertainty about U.S. trade policy adds considerable downside risk to the prospects for international trade. As a result, many decisions about capital projects and hiring will remain on hold until trade policies are more predictable. That will be true for many of the industries that tariffs are expected to protect. Until there is more certainty on trade policies, most of the potential benefits of trade associated with the development of domestic industries cannot be realized. But we think that the wild swings in imports and exports are over, and we expect them to decline moderately. The global economy will grow faster than the U.S. economy, which should boost American exports, but we expect exports to drop because of the global trade war. Tariffs will force U.S. imports to decline much faster, however. The high value of the U.S. dollar will be another obstacle to export growth, although depreciation is likely to be modest. Inflation Tariffs-induced price adjustments provide a short-term boost to inflation, but do not support sustained inflation. Assuming the effective tariff rate peaked in 2025, we expect the U.S. inflation rate to peak at 3.5 percent in 2026 and to retreat to 3 percent in 2027. By themselves, tariffs (or taxes on imported capital goods) will not support an inflationary spiral, and the slowdown in GDP and job growth will vent inflationary pressures; therefore, the U.S. inflation rate will not drop to the low levels experienced before the pandemic recession. Still, several drivers of inflation are unlikely to improve. For example, the money supply is growing faster than the real economic output. We estimate that the money supply grew about 5 percent in 2025 compared to 1.5 percent GDP growth, and we expect that imbalance to continue. In addition, large annual federal budget deficits contribute to inflation. The retreat from globalization and less favorable demographics contribute, too. Regulation at all levels of government is a slight tailwind for inflation. The Trump administration is reducing many federal regulations, but international trade and im- migration will be much more heavily regulated. Also, the net effect on the overall federal regulatory burden is uncertain. More positively, increased productivity— probably due to AI—will help to limit inflation.

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