US economic forecast | Deloitte Insights

Scenarios

Baseline

Higher energy costs, rising interest rates, weaker population growth, and geopolitical tensions have thus far been insufficient to significantly derail growth in real gross domestic product, which was up 2.1% from a year earlier in the second quarter. Domestic demand in the private sector, that is, real final sales to private domestic purchasers—was even stronger at 2.7%.

The strength of the economy is primarily due to business investments related to artificial intelligence and the positive wealth effects from strong equity price gains. As a result, we have raised our outlook for business investment, consumer spending, and therefore economic growth.

While we anticipate stronger growth compared to our June forecast, we still expect real GDP growth to moderate by a bit over the next two years. Although strong, the rate of growth in business investment is expected to begin moderating in 2027. Consumer spending is likely to slow as well. We expect elevated inflation and rising interest rates to weigh on both investment and consumer spending. Meanwhile, consumer spending growth has outpaced post-tax income growth for more than two years, suggesting consumers are likely to pull back on spending soon.

The public sector is also expected to provide a modest headwind to growth in the near term. Fiscal policy had been a tailwind at the start of this year, with tax cuts supporting income and spending growth. However, it is expected to turn more contractionary as certain tax credits are phased out.² International trade will also do little to spur growth as relatively modest global growth and trade tensions weigh on exports. We expect real GDP growth to slow modestly from 2.1% in 2026 to 1.9% in 2028.

Beyond the next two years, real GDP growth is expected to accelerate, supported in part by anticipated improvements in productivity associated with AI investments. At the same time, we expect inflation to move lower, bringing interest rates down as well, which will further fuel the economy. We expect real GDP growth to accelerate to 2.3% by 2031—up slightly from the 2.2% growth forecasted last year.

Downside: Open-weight and foreign models outcompete

Our downside scenario assumes that the return on AI-related investments in the United States is far lower than what investors currently expect. Consumers and businesses primarily opt for lower-cost, open-weight models for their needs. In addition, we assume foreign models gain market share relative to US models in much of the rest of the world, limiting external demand for US models.

In this scenario, we assume an equity-market correction of 35%, bringing the cyclically adjusted price-to-earnings ratio down to its average between 2003 and 2005. Beginning in the third quarter of 2027, business investment declines about 12% over the course of two years, pushing investment levels down to where they were roughly three years prior to the contraction. Default rates rise on the rapidly growing debt that was issued to finance the AI buildout. This initially contributes to a broad tightening of financial conditions as loans are written down and lenders become more risk-averse.

Just as positive wealth effects supported consumer spending in early 2026,³ the negative wealth effects created by the drop in equity prices lead to a pullback in consumer spending. The unemployment rate rises to 7.2% amid the slowdown in economic activity, further restraining consumer spending. Real GDP grows by just 0.2% in 2027 before contracting by 1.2% in 2028.

As the recession begins to take hold, we assume the US Federal Reserve embarks on a series of interest rate cuts. This helps stabilize the economy and equity markets. However, the subsequent recovery is assumed to be much slower than after previous downturns. This is partially due to relatively small fiscal stimulus amid concerns over rapidly growing government debt and reinvigorated inflation resulting from large stimulus programs.

Unlike previous innovation cycles, the investments made in the United States do not retain their usefulness in the future. US businesses and consumers opt for cheaper, investment-light models, leaving frontier model developers with a much smaller customer base. Furthermore, foreign firms are expected to capture a larger market share outside of the United States. This reduces the economic value of some of the capital invested in more expensive frontier models and limits business investment from rebounding more quickly once the economy stabilizes. Real GDP growth during the recovery from 2029 through 2031 averages just 1.5% per year.

Upside: Inflation retrenches while AI investment runs ahead

We assume that the average US tariff rate falls to about 5% by early next year, as additional exemptions are granted and courts limit the scope of certain tariffs. Geopolitical tensions also moderate, reducing pressure on commodity prices. Oil prices are expected to stay below the baseline, with Brent crude averaging US$86 per barrel in 2026 and US$67 per barrel in 2027. Stronger net migration results in the adult population being roughly 868,000 higher than in the baseline by 2031. Business investment, supported largely by AI-related activity, remains stronger than in the baseline throughout the forecast period, while AI-related productivity gains are assumed to begin providing a larger boost to growth starting in 2028.

Consumer spending remains relatively strong, supported by faster population growth and continued gains in equity markets. Stronger investment and economic activity are assumed to generate sufficient labor demand to absorb the additional workers entering the labor force through higher migration. As the labor market tightens and productivity growth strengthens, faster real wage growth is expected to provide an additional boost to household spending. The unemployment rate remains below the baseline throughout the forecast period and eventually stabilizes at around 4.1%.

Although stronger in aggregate, business investment is likely to remain uneven across sectors. Elevated long-term interest rates continue to restrain investment in industries with less exposure to AI. However, lower tariffs are expected to reduce the cost of imported inputs and capital goods, particularly for capital-intensive businesses, helping to offset some of the drag from elevated financing costs.

Lower tariffs and oil prices are expected to help contain inflation despite stronger economic activity. We expect core inflation to remain marginally below the baseline through the third quarter of 2027. Thereafter, stronger demand from business investment and consumer spending is expected to place modest upward pressure on core inflation through 2029, although stronger productivity growth limits the extent of those pressures.

Lower near-term inflation reduces the likelihood that the Fed will need to raise interest rates again this year. At the same time, strong demand and a relatively tight labor market keep rates unchanged until the start of 2028.