By\u00a0Mohamed El-Erian*<\/p>\n
Forecasting a central scenario for the US economy in 2026 appears to be a straightforward exercise. But the probability that this baseline forecast would materialise probably does not exceed 50%: the \u201cnormal\u201d bell distribution has been replaced by one with unusually \u201cfat tails\u201d: the probability of more extreme outcomes, both virtuous and vicious, is significant and equally possible. The US economy is not so much on a single trajectory as it is locked in a tense tug-of-war between three distinct futures: a \u201cGoldilocks-lite\u201d central baseline, a productivity-fueled upside scenario, and a volatile downside scenario.<\/p>\n
The central scenario envisions a relatively strong economy, which continues to defy predictions of a cyclical downturn and gradually builds secular strength, owing primarily to robust AI-related investment. By next year, the United States will be moving on from the currently dominant infrastructure phase of the AI revolution \u2013 the frenetic build-out of data centers and hardware \u2013 and will include more integration. Capital expenditure will remain historically high, driven by the dual imperative of working \u201con\u201d and \u201cwith\u201d AI.<\/p>\n
Complementing this corporate dynamism is a still-resilient consumer base, supported by accommodative fiscal and monetary policies. The American household has proven to be a durable growth engine, albeit a weakening one. With the fiscal taps open, and the Federal Reserve poised to reduce interest rates, it may well remain so, despite elevated prices that hit lower-income households particularly hard. But sticky inflation will remain a reality. While price increases might not be severe enough to de-anchor expectations, they will likely remain above the Fed\u2019s target, precluding a return all the way to the ultra-low interest rates of the 2010s.<\/p>\n
This scenario also includes the crystallisation of an unsettling phenomenon: the decoupling of employment from GDP. Historically, robust economic growth has been inextricably linked to strong job creation. But this relationship appears to be under pressure, meaning that growth in 2026 may be accompanied by a relatively stagnant labor market. Such jobless growth would exacerbate the K-shaped nature of the economy\u2019s performance. As such, affordability will remain a social and political flashpoint, keeping inequality at the forefront of the national discourse.<\/p>\n
This is a central scenario that includes a lot of \u201cdispersion,\u201d and not just domestically. Internationally, the US significantly outperforms other major economies. Hampered by structural rigidities, the eurozone and the United Kingdom remain trapped in a low-growth, low-investment equilibrium. With China\u2019s efforts to upgrade its growth model progressing slowly, the US will serve by far as the global economy\u2019s primary engine \u2013 a concentration that creates its own set of risks.<\/p>\n
As for the \u201cfat tail\u201d scenarios, their probabilities are roughly equal, offering reasons for both hope and anxiety. On the right-hand side, one finds a tantalising vision of an economy that doesn\u2019t merely grow but accelerates, while also expanding future capacity. In this scenario, faster-than-anticipated AI adoption, combined with robotics, is translated into tangible, economy-wide productivity gains, enabling the US to pull further ahead of other major economies.<\/p>\n
If this \u201cproductivity promise\u201d materialises rapidly enough, the US could experience a non-inflationary boom. Because the supply side expands rapidly enough to meet rising demand, inflation remains in check. This is a Goldilocks scenario on steroids: a technology-driven expansion that expands corporate margins and increases tax revenues, potentially alleviating fiscal pressures and enabling the Fed to cut rates more aggressively.<\/p>\n
But equally probable is the downside scenario: not a standard recession born of exhausted demand, but a surge in volatility, stemming from financial instability, policy error, election-year politics, and geoeconomic developments. An important risk lies in the bond market. With US deficits still large, debt-service costs climbing, and AI-related investment requiring further financing, the bond vigilantes could make a comeback. A sudden spike in yields could unsettle the financial system, undermining economic activity far beyond America\u2019s borders. What happens in the US Treasury market rarely stays there.<\/p>\n
This financial fragility is compounded by the potential for policy mistakes \u2013 whether a fiscal error or a misstep on monetary measures \u2013 at a time when policymakers\u2019 room for maneuver is delicate. With midterm elections looming, this is a risk that would also have consequences for a global economy that is heavily dependent on the US engine. When combined with geopolitical tensions \u2013 trade wars, supply-chain weaponisation, or direct conflict \u2013 the prospect of a stagflationary shock becomes salient.<\/p>\n
As 2026 begins, we must not allow a comforting central forecast to nurture complacency. In statistical terms, we are looking not at a normal distribution, but at a multi-modal one: a plausible path of robust, AI-led growth sits in the middle, flanked by a productivity miracle on one side and a risk-laden downside on the other. Investors and policymakers must account for all of these outcomes \u2013 and for the pronounced dispersion, among countries, sectors, and households, that unites them.<\/p>\n
Mohamed A. El-Erian, President of Queens\u2019 College at the University of Cambridge, is a professor at the Wharton School of the University of Pennsylvania and the author of\u00a0The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse<\/a>\u00a0(Random House, 2016) and\u00a0a co-author (with Gordon Brown, Michael Spence, and Reid Lidow) of\u00a0<\/a>Permacrisis: A Plan to Fix a Fractured World<\/a>\u00a0(Simon & Schuster, 2023). \u00a0Copyright:\u00a0Project Syndicate<\/a>, 2025, published here with permission.<\/p>\n","protected":false},"excerpt":{"rendered":"By\u00a0Mohamed El-Erian* Forecasting a central scenario for the US economy in 2026 appears to be a straightforward exercise.…\n","protected":false},"author":2,"featured_media":363141,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164],"class_list":{"0":"post-363140","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-au","9":"tag-australia","10":"tag-business","11":"tag-economy"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/363140","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=363140"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/363140\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/363141"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=363140"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=363140"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=363140"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}