The U.S. economy is poised to post its sixth consecutive year of 2%+ real growth, buoyed by spending by high-income households and tech investment. But traditional capex and construction activity are treading water, and the economy is struggling to create jobs
Development exemption from government shutdown
We have revised down our 2026 growth forecast from 2.3 percent to 2.7 percent, reflecting in part a strong fourth quarter in 2025. The government shutdown was thought to mean growth would slow notably in the fourth quarter, but the private sector has performed well and the $29bn deficit in October’s trade report was the smallest since 2009 when the economy was depressed.
This sharp narrowing of the trade deficit likely reflects delayed shipments related to the hope that early ‘Liberation Day’ tariffs will be cut. Given that products can take months to ship by sea, these decisions take time to reflect in US data. Trade conditions will eventually return to normal, but we think 4Q GDP expansion is forecast to be closer to 2.5% even with a rundown in inventories.
Growth continues in high-income households and tech
By 2026, the K-shaped narrative surrounding the economy in both the corporate and household sectors dominates, and this should sustain growth in 1h 2026. Spending is tight among the top 20% of households by income, with higher incomes and rising wealth fueling inflationary sentiment and concerns about protecting the bottom line. Some tax changes could help lower-income households on the margins, with higher tax refunds expected this year as well, but the jury is still out on the potential timing and scale of the $2,000 “tariff dividend” payment to be made by the president.
Regarding corporate spending, we’ve seen four quarters in a row where business capex outside of tech has contracted, yet investment in computing and software grew 20% year over year. This divide is set to remain a theme through most of 2026, although there is a sense that we may see some moderation in the pace of tech capex growth as business leaders and shareholders look for a return on the money spent. Similar patterns are expected for the construction sector.
At the same time, the jobs market is losing steam with federal government workers falling by 173,000 in September. November and December gained 56 kilos and 50K, respectively, but Federal Reserve Chair Jerome Powell’s claim that the Bureau of Labor Statistics’ likely increase of 60 kilos means that jobs have stalled—a low-rent, low-fire economy.
Consumers continue to spend despite weak sentiment
Source: Macrobond, ING
Inflation and job woes mean two more fed cuts
Inflation data from the shutdown delay confirmed that rates are not having the immediate impact on prices that most had feared. We cannot rule out that this will ultimately lead to higher prices, as there is a belief that some companies are delaying higher costs to consumers until the Supreme Court rules on IEEPA’s rates. But even if the Supreme Court specifically rules against them, President Trump’s team will be looking to quickly restore the tariffs through an alternative route.
However, the fact that rates are moving so slowly provides greater opportunity for lower energy costs, lower housing rents and weakening wages to allow inflation to fall to 2 percent. Given this backdrop and the caution surrounding the jobs market, we expect the Fed to hike twice more in 2026. However, the first cut is now more likely in the second quarter rather than March as we previously predicted.
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