Bank of America Economist's 2026 US Economic Outlook: Growth Drivers and K-Shaped Economy Analysis

2026 Economic Forecast: Optimistic Outlook

• 🚀 Our forecast for next year is optimistic, driven by five key tailwinds.
• 💰 Fiscal policy is expected to contribute 3-4% to GDP growth through stimulus from a "big beautiful bill" for capex and consumers.
• 📉 The lagged effect of Federal Reserve rate cuts will provide monetary stimulus.
• ✨ AI-related tailwinds are anticipated to continue supporting economic growth.
• 🤝 Trade policy is projected to become more supportive of growth compared to this year, irrespective of AIPA tariffs.
• 📊 Base effects from the shutdown are also expected to be helpful for growth.

Analyzing the K-Shaped Economy

• 🧩 The K-shaped economy concern is addressed: our base case sees lower-income spending stabilizing, supported by upper-income spending, which will put a floor under the job market.
• ⚠️ While it remains a K-shaped scenario, it's not the most worrying kind, where upper-income spending is weak. Instead, lower-income spending is holding on while higher-income spending is strong.
• 📈 Higher-income spending on services is expected to eventually help stabilize the labor market in this service-driven economy.

Labor Market and Consumer Spending Dynamics

• 💡 Consumer spending is seen as a leading indicator for jobs, rather than vice versa.
• 📉 The resilience in consumer spending over recent months bodes well for the labor market, suggesting the unemployment rate will stabilize and eventually drop in the latter half of next year.
• ⚠️ Interest rate cuts from the Fed do help, but consumer spending stability is a more significant factor.

Consumer Sentiment vs. Spending

• 🎭 Consumer sentiment has been disconnected from consumer spending for the past four years and doesn't necessarily need to shift.
• 📈 We've seen a period of strong consumer spending with weak consumer sentiment, which could continue.
• ⚠️ Weak consumer sentiment is likely related to cumulative price increases and political polarization.

Political Discourse and Trade Policy

• 🗳️ Midterm elections likely incentivize the administration to favor growth-oriented trade policy.
• 🇨🇳 The administration is expected to focus on delivering good news on trade, potentially through a deal with China on fentanyl tariffs or a renewal of the USMCA, even if tariffs are not overturned.