Goldman Sachs 2026 US Economic Outlook
From the TightSpreads Substack.
By David Mericle, GS US Economics Research
The US economy grew faster in 2025 than looked likely after large tariffs were announced last spring, both because the most disruptive tariffs were scaled back and because some of the risks that tariffs posed had less impact than history might have suggested. But GDP growth that likely exceeded 2% was not enough to prevent the labor market from gradually softening a bit further.
Our strongest conviction views for 2026 are our above-consensus GDP growth forecast and our below-consensus inflation forecast. The outlook for the labor market is more uncertain—we expect it to stabilize but see the possibility of further softening as the key risk for 2026.
We forecast GDP growth of 2.5% (vs. 2.1% consensus) in 2026 on a Q4/Q4 basis or 2.8% on a full-year basis as the drag from tariffs gives way to a boost from tax cuts. We have also lowered our 12-month recession probability from 30% to 20%. Tax cuts, real wage gains, and rising wealth should sustain solid consumer spending growth, and new tax incentives, easier financial conditions, and reduced policy uncertainty should boost business investment. The composition of GDP growth will look different from last cycle in the years ahead: more will come from productivity growth, which has rebounded and should receive a boost from artificial intelligence, and less will come from labor supply growth with immigration now much lower.
We expect core PCE inflation to fall to 2.1% year-over-year by December and core CPI to fall to 2.0%. Our inflation forecast is 0.3pp below consensus, the FOMC, and market pricing. We are confident in part because we think there was actually meaningful progress in 2025 that was masked by a moderate one-time boost from tariffs that should fade this year, and in part because we expect labor market rebalancing and the exhaustion of catch-up inflation to drive a bit more progress toward the target this year. In fact, the two most valuable indicators for forecasting inflation further ahead—the state of the labor market and leading indicators of rent inflation—now point to lower inflation than they did late last cycle.
Our baseline forecast for the labor market is that a small pickup in GDP growth and a decline in policy uncertainty will boost hiring just enough to stabilize the unemployment rate at 4.5%. But we see several risks here: the starting point for job growth is weak and narrow, job openings have continued to slowly trend lower, and companies are increasingly discussing layoffs and are eager to use artificial intelligence to reduce labor costs. As a result, we see a period of jobless growth similar to the “jobless recovery” of the early 2000s as a plausible alternative scenario.
Lower inflation would resolve one source of disagreement among Fed officials, but they will likely still have a range of views on the appropriate terminal rate. We expect them to meet in the middle, delivering two 25bp cuts in June and September (vs. our previous forecast of March and June) to 3-3.25%. We see the risks as tilted to the downside, and our probability-weighted Fed forecast is a bit below both our baseline and market pricing.
2026 US Economic Outlook: Solid Growth, Low Inflation, Shaky Labor Market
The US economy appears to have grown more than 2% in 2025, similar to consensus expectations at the start of last year but a faster pace than looked likely after large tariffs were announced last spring.
One reason that the economy beat those early April expectations is that the White House scaled back the largest tariffs that would have been the most economically disruptive. But another is that while the tariffs did act like a tax increase and create uncertainty for businesses, some of the potential negative effects of tariffs that historical experience might have suggested did not amount to much—foreign retaliation was limited, the dollar depreciated instead of appreciating, and the stock market eventually moved past tariff concerns. There is a prominent alternative narrative that the boom in artificial intelligence investment simply offset the tariff blow and powered much of last year’s GDP growth, but its impact was actually quite limited, in part because some of it is missed in the GDP statistics.
While the economy performed well from a GDP perspective, 2025 looks different from a labor market perspective. Job growth slowed sharply last year, and the unemployment rate rose somewhat.
Exhibit 1: GDP Growth in 2025 Turned Out Better Than Looked Likely When Large Tariffs Were Announced in the Spring, in Part Because the Most Disruptive Tariffs Were Scaled Back
Source: Goldman Sachs Global Investment Research, Bloomberg
Our strongest conviction views for 2026 are our above-consensus GDP growth forecast and our below-consensus inflation forecast. The outlook for the labor market is more uncertain—we expect it to stabilize but see the possibility of further softening as the key risk for 2026.
Solid GDP Growth as the Tariff Drag Gives Way to a Boost from Tax Cuts
We forecast GDP growth of 2.5% (vs. 2.1% consensus) in 2026 on a Q4/Q4 basis or 2.8% (vs. 2.1% consensus) on a full-year basis. We have lowered our 12-month recession probability from 30% to 20%—slightly above the historical unconditional average of 15%—in response to early signs of labor market stabilization, discussed below, and our expectation that the largest policy risks are behind us.
The key driver of our forecast for solid growth this year is that the drag from tariff increases should give way to a boost from business and personal tax cuts included in the One Big Beautiful Bill Act (OBBBA). Because the fiscal boost will be frontloaded and the end of the government shutdown will provide a mechanical boost of about 1.3pp in Q1, we expect GDP growth to be stronger in the first half of the year.
Our forecast assumes that with the midterm elections approaching and the cost of living emerging as a major political theme, the White House will avoid significant further tariff increases. In fact, we expect the effective tariff rate to fall by about 2pp—resulting in a 9.5pp net increase since the start of 2025—because new deals and exemptions could lower the effective tariff rate, and any new tariffs that replace tariffs the Supreme Court might overturn would likely be capped at 15%, below some current rates.
Exhibit 2: We Expect Somewhat Stronger Growth in 2026 as the Tariff Drag Gives Way to a Fiscal Boost
Source: Goldman Sachs Global Investment Research
Consumer spending should continue to grow steadily at around 2.2% in 2026 Q4/Q4, supported by tax cuts, slightly larger real wage gains as inflation slows by more than wage growth, and a moderate wealth effect. While we think the “K-shaped economy” narrative has been exaggerated a bit, we do expect weaker consumption growth in 2026 at the low end, where lower immigration will weigh more on job and income growth and government spending cuts will hit hardest. Consumption growth should be stronger in the middle, which will benefit the most from the new personal tax cuts, and at the top, which will benefit from a wealth effect driven by equities.
Exhibit 3: New Tax Cuts, Solid Real Wage Growth, and a Positive Wealth Effect Should Keep Consumer Spending Growth Above 2%
Source: Goldman Sachs Global Investment Research, Department of Commerce
We expect business investment to be the strongest component of GDP in 2026, growing 5½% Q4/Q4. Business investment should benefit from easier financial conditions, reduced policy uncertainty, and more generous tax incentives. At the industry level, tax policy changes from the OBBBA should reduce the cost of capital and boost investment most in the manufacturing sector, though its impact there will be offset by the fading effect of Inflation Reduction Act and CHIPS Act subsidies. We expect investment in artificial intelligence to contribute about 1.5pp to measured capex growth this year, but the net impact on GDP growth would be only 0.1-0.2pp because much of the spending will be on imported equipment.
Exhibit 4: Business Investment Should Be the Strongest Part of the Economy in 2026, Boosted by More Generous Investment Tax Incentives, Easier Financial Conditions, AI Spending, and Less of a Tariff Drag
Source: Goldman Sachs Global Investment Research
Residential investment is likely to remain weak in 2026 for familiar reasons: mortgage rates remain high, affordability is constraining demand for single-family housing, a great deal of new apartment supply has come online in recent years or is nearing completion, and lower immigration is a hit to both the demand and supply sides. If the Fed delivers rate cuts roughly in line with what markets already expect and longer-term interest rates consequently remain steady, the housing sector is likely to remain weak.
Exhibit 5: We Are Above Consensus on GDP Growth in 2026, Especially on Business Investment
Source: Goldman Sachs Global Investment Research, Bloomberg
The composition of GDP growth will look different from last cycle in the years ahead: more will come from productivity growth, which has already rebounded to its historical average pace of 2% this cycle and should receive a further boost from artificial intelligence, and less will come from labor supply growth because net immigration has fallen to well below its rate in the 2010s.
Exhibit 6: In the Years Ahead, More GDP Growth Is Likely to Come from Productivity Growth, Which Has Rebounded to Its Average Historical Pace After Being Depressed Last Cycle, and Less Will Come from Labor Supply Growth, Which Has Declined as Immigration Has Fallen Below Its Pre-Pandemic Rate
Source: Goldman Sachs Global Investment Research, US Department of Commerce
Inflation Nears the Target as Tariff Effects Fade
Our inflation forecast for 2026 is also more optimistic than consensus and is perhaps our most differentiated view. We expect core PCE inflation to fall to 2.1% year-over-year by December and core CPI to fall to 2.0%. Our forecasts are about 0.3pp below consensus, the FOMC, and market pricing.
Exhibit 7: Our 2026 Inflation Forecasts Are 0.3pp Below Consensus, the FOMC, and Market Pricing
Source: Goldman Sachs Global Investment Research, Bloomberg
We are confident that inflation will decline in part because we think there was actually meaningful progress in 2025, especially in the shelter category, that was masked by a moderate one-time boost from tariffs that should fade this year. While progress on core PCE inflation has stalled at 2.8% year-over-year, we estimate that passthrough from tariffs to consumer prices has contributed 0.5pp, primarily in goods categories, which implies that inflation excluding the one-time effect of tariffs has already fallen to 2.3%.
Exhibit 8: While Core Inflation Held Roughly Steady in 2025, There Was Progress in Shelter and Other Categories That Was Masked by a Moderate One-Time Boost to Goods Prices from Tariffs
Source: Goldman Sachs Global Investment Research, Department of Commerce
The other reason we are confident that inflation will fall further is that two straightforward forces that have driven it lower for three years have a bit further to go. The first is the exhaustion of “catch-up inflation,” where some prices adjust with a longer lag and therefore keep rising at a faster pace until they have caught up. In the most prominent example of this, the shelter category, catch-up ended last year, and the key leading indicator—new lease rent growth—has now fallen to well below its pre-pandemic rate. As a result, we expect the large shelter category to slow from 3.7% to 2.3% by December.
Exhibit 9: Shelter Inflation Is Likely to Slow Substantially Further in 2026 Because “Catch-up Inflation” Is Now Behind Us and Rent Growth on New Leases Is Running Well Below Its Pre-Pandemic Pace
Source: Goldman Sachs Global Investment Research, Department of Commerce
The second driver of lower inflation has been labor market rebalancing. Our wage growth tracker has fallen by over 2pp to 3.5%, a rate that is compatible with 2% or sub-2% inflation with productivity growth running near 2%, and survey-based expectations suggest that wage growth has a bit further to fall. This should put additional downward pressure on inflation in labor-intensive non-housing services categories.
Exhibit 10: Wage Growth Has Already Slowed to a Pace Consistent with 2% Price Inflation and Is Likely to Slow Further, Which Should Continue to Put Downward Pressure on Other Core Services Categories
Source: Goldman Sachs Global Investment Research, Department of Commerce
While core inflation is likely to stand close to 2% by the end of the year in both PCE and CPI terms, both inclusive and exclusive of tariff effects, there will be a few final bumps along the disinflationary road. We expect a 0.2pp boost to inflation in December caused by shutdown-related distortions to data collection in October and November, one final “January effect” as companies pass through more tariff costs in their annual price resets, and roughly an extra month’s worth of shelter inflation in April as a result of the statistical agency’s assumption that the missing prices for the same six-month panel in October were unchanged.