U.S. Economic Outlook for 2026: A Positive Wave with Growing Fragility

As 2026 begins, it is useful to anchor the outlook in the conditions that wrapped up 2025. The United States ended last year with resilient consumer demand and ongoing investment in high-tech capacity, as debt levels climbed, supporting spending across governments, corporations, and households. The financial system also tilted toward a more open posture, with regulators weighing several deregulatory proposals that could lift investment opportunities and credit flows in the near term. Taken together, these forces suggest a stronger economy in 2026 than anticipated only a few weeks ago.

Looking to 2026, the consensus among private forecasters and international institutions has been adjusted up, showing GDP growth above the 2% mark, often in the 2.2% to 2.6% range. The core growth drivers are threefold: sustained fiscal and monetary policy stimulus in an election year, resilient household demand, and AI investment that keeps business capex elevated even as other investment categories remain unchanged or cool. Finally, regulators will continue their more risk‑tolerant financial framework, with proposals to ease certain bank capital requirements and a shift to streamlined supervision. If realized, these forces will boost credit creation and growth in 2026. However, they also introduce expanded vulnerabilities as the economy’s risk profile and reliance on ever greater leverage behind the growth take their toll on the nation’s credit infrastructure.

Election-year fiscal stimulus and its demand implications

As 2026 unfolds, political incentives are aligned toward expansionary fiscal measures. Following 2025 legislation, tax relief, rebates, and targeted spending on infrastructure and defense projects are expected to lift aggregate demand in the near term, supporting employment, higher output, and confidence among middle-class households and firms. Historically, incumbents in election years lean away from austerity, and 2026 appears to fit that pattern. The magnitude and composition of this stimulus will be decisive for whether growth accelerates toward the upper end of forecasts or remains more modest.

That said, the Federal Reserve will play a major role in how the impending government spending, large deficits, and debt service costs will be managed forward. Recent history suggests that the Fed will accommodate fiscal policy. It is again engaged in quantitative easing (QE), purchasing $40 billion per month of Treasury debt, under its ample reserves framework, keeping interest rates subdued, an essential ingredient in assuring a favorable growth outlook. The Fed will be under enormous pressure to carry through on its part of the fiscal-monetary policy framework. However, this comes with risks beyond 2026. Should accommodative fiscal and monetary policies be extended too long, they raise the risk of future asset and price inflation, and ultimately the painful tightening of financial conditions as the Fed scrambles to restore price stability. Politics often favors one-off measures to raise near‑term GDP, but the durability of gains will depend on the policy mix and the degree to which higher debt burdens crowd out public and private priorities.

Tariffs, geopolitics, and global demand

Tariffs weighed on some sectors in 2025, but the global demand picture has shifted in ways that cushion the U.S. economy. Across the world, geopolitical pressures have spurred larger defense and infrastructure outlays, heightening demand for high‑tech equipment and capital goods, areas where the U.S. has strong competitive positions. Japan’s late‑2025 defense budget, for example, reflects a broader shift in Asia toward greater preparedness, while European partners have expanded defense and infrastructure spending, and NATO has reaffirmed a strong security commitment. These dynamics support U.S. defense and semiconductor manufacturing, providing a counterweight to tariff-induced drag on imports and exports.

International bodies, the IMF for example, have stressed that tariffs’ direct drag on U.S. output remains but are more modest than originally feared. The Wall Street Journal, quoting the Penn Wharton Budget Model, noted the U.S. effective average worldwide tariff is 10%, while that for China is just above 37%. Also, the rest of the world has been restrained in its response to U.S. tariffs, thus mitigating the hit to world and U.S. growth that was earlier expected. This response on the part of U.S. trading partners, combined with their stepped-up spending in response to global geopolitical events, is persuasive evidence that while trade frictions will persist, they are unlikely to derail the expansion in 2026, though some sector-specific effects will remain.

Middle-class consumption and housing wealth: the leverage channel

A defining feature of 2026 will be household-funded consumption through housing wealth. In recent years housing asset prices have risen sharply and have been especially beneficial to households holding substantial homeowners’ equity. As reported by Meredith Whitney Advisory Group, for example, the average cash-out refinance in recent quarters has been growing at a rate near 6-7%—a signal that households are extracting liquid funds as a cushion against slow income growth and tighter credit conditions elsewhere. The share of refinancings that are cash-out rose meaningfully as homeowners sought liquidity for discretionary purchases and debt consolidation. HELOC activity also remained robust, buoyed by large equity cushions and accessible borrowing baselines in many markets. This leverage channel will help sustain consumer spending even as wage earners struggle with inflation, or when other forms of credit remain comparatively costly. The upshot is a consumer sector that can maintain momentum through 2026 even as a mixed labor market challenges middle and lower-middle income groups.

But the leverage channel also carries risks. Delinquencies in consumer credit have risen in pockets of the market, highlighting that not all households are equally insulated. Should interest rates rise and the economy slow, or if incomes fail to match or exceed inflation and debt service becomes relatively more burdensome, the outlook for consumption and growth could falter quickly.

AI and high-tech investment: A boon to growth

Investment in artificial intelligence and related high‑tech infrastructure remains a bright spot for 2026. Goldman Sachs and other sources, for example, are projecting that global AI spending will approach the $2 trillion threshold, with data centers, GPUs, cloud services, and AI software driving capital outlays. U.S. corporations—led by major technology players—are also expanding their AI capacity and reinvesting earnings into AI-enabled platforms with spending estimates exceeding $500 billion. This not only boosts IT and semiconductor demand but is expected to have effects on productivity and profitability, supporting further investment forward.

IMF analyses also have suggested that AI-driven productivity gains can offset some tariff-related weakness by lifting efficiency and growth in output. Private-sector reporting highlights the wealth effects from rising AI‑led earnings, which can feed further spending through higher asset valuations and increased confidence. While there is concern that AI could impede employment growth, history suggests that over time the gains in productivity and new employment opportunities are worth the transition costs. A more immediate risk is that AI enthusiasm could overshoot fundamentals and eventually lead to a valuation correction.

Deregulation, open markets, and risk-taking

A defining feature of 2025 which is likely to accelerate in 2026 is the embrace of more open, less regulated markets. There has been, for example, an easing of bank capital requirements and a shift toward more streamlined, risk‑based supervision, with some areas permitting self-certification for non-critical compliance. Such changes, if expanded in 2026, will raise banks’ ability to leverage their balance sheet, ease underwriting standards and accelerate credit growth, particularly in mortgages, consumer finance, and higher-risk corporate finance.

This more laissez-faire economic philosophy, while it will accelerate consumption and investment, and help keep credit and economic growth buoyant, comes with its own risks. It will almost certainly raise the risk profile of banks and related capital market institutions. If it leads to less rigorous credit standards, it will raise the probability of mispricing evolving risks. With higher leverage, and eventually greater vulnerability to unanticipated shocks, markets can quickly become unsteady. The most likely path for 2026, therefore, is more credit access, faster growth, and the acceptance of a higher financial risk environment, especially as 2026 progresses.

Growth outlook and medium-term risks

Taken together, the forces described above point to a stronger‑than‑2025 performance in 2026, with forecasters generally placing GDP growth in the mid‑2% territory. IMF and OECD projections hover near 2.0%–2.5%. The composition of growth is likely to be led by resilient consumer spending—underpinned by housing wealth and favorable fiscal signals—and by business investment in AI and IT infrastructure, augmented by government demand from infrastructure and defense initiatives.

But there is a meaningful caveat. The same drivers that push growth forward—elevated leverage, abundant credit, and asset-based wealth effects—also sow the seeds of fragility. Distributional effects are also a critical piece of the story. A possible K-shaped pattern—where asset-rich households prosper while others struggle with stagnant wages and higher borrowing costs—could shape consumption, savings, and financial stability.

The federal government’s debt stack has grown rapidly, and by late 2025 the debt trajectory raised concerns about longer‑term inflationary pressures and tax responses. Corporate leverage has risen in parts of the economy, and delinquencies in consumer credit have crept higher, especially among households with tighter budgets. In other words, the economy in 2026 could be robust in the near term, yet more sensitive to shocks in the years that follow if leverage and financial vulnerabilities intensify.