Introduction
Predicting a central scenario for the U.S. economy in 2026 may seem straightforward, but the probability of this scenario materializing does not exceed 50%. Instead of a traditional bell-shaped distribution, we now face a distribution with unusually amplified extremes (both positive and negative) that have significant chances of occurring. The U.S. economy is not following a single trajectory but is caught in a tense tug-of-war between three distinct futures: a moderately good central scenario, an upbeat scenario driven by productivity, and a volatile downside scenario.
Central Scenario: A Robust Growth Path Fueled by AI
The central scenario anticipates a relatively strong economy that continues to defy cyclical slowdown predictions and accumulates long-term strength, primarily due to solid AI-related investments. By next year, the U.S. will have surpassed the current phase of AI revolution dominated by infrastructure accumulation (frantic data center and hardware buildup) and transitioned to a more integrated phase.
- Capital spending will remain at historically high levels, driven by the dual need to work “in” and “with” AI.
- Business dynamism complements a still-resilient consumer base, backed by expansive fiscal and monetary policies.
- U.S. households have demonstrated sustained, albeit diminishing, capacity to support growth.
- Generous fiscal support and the Federal Reserve’s willingness to keep interest rates low will likely maintain this trend, despite inflationary pressures primarily affecting lower-income households.
However, persistent inflation will remain a reality. Although price hikes may not be severe enough to trigger runaway inflation expectations, they are likely to stay above the Fed’s target, preventing a return to ultra-low interest rates from the 2010s.
This central scenario also highlights an unsettling phenomenon: the detachment of employment from GDP growth. Historically, robust economic figures have meant job creation. However, this relationship seems strained, potentially leading to growth in 2026 accompanied by stagnant job markets. This growth without jobs would exacerbate the emergence of a “K-shaped” economic performance, keeping access to goods and services a hot social and political topic and perpetuating income inequality as a central national debate.
International Context and Risks
In the international context, the U.S. economy significantly outperforms other major economies. Burdened by structural rigidities, the eurozone and the UK remain trapped in a low-growth, low-investment equilibrium. China’s slow progress in modernizing its growth model further isolates the U.S. as the primary global economic driver, creating its own set of risks.
Extreme Scenarios: Hope and Fear
The probabilities of extreme scenarios are roughly equal, justifying both hope and concern. The most optimistic scenario envisions not just growth but accelerating growth, expanding future capacity. Rapid AI adoption, combined with robotics, could translate into tangible productivity improvements across the economy, allowing the U.S. to widen its lead over other significant economies.
- If this “productivity promise” materializes swiftly, the U.S. could experience non-inflationary prosperity.
- Supply would grow rapidly enough to meet increasing demand, keeping inflation in check.
- This would be an amplified “Golden Age” scenario, technology-driven expansion improving corporate margins and tax revenue, potentially easing fiscal pressures and enabling the Fed to lower interest rates more aggressively.
However, an equally likely negative scenario involves increased volatility due to financial instability, misguided policies, election-year uncertainties, and geoeconomic factors. A significant risk lies in the bond market.
- With persistently high U.S. deficits, rising debt-servicing costs, and the need to continue financing AI investments, bond market “vigilantism” could resurface.
- A sudden rise in yields could destabilize the financial system and weaken economic activity both within and outside the U.S.
This financial fragility is exacerbated by the possibility of policy errors at a time when policymakers’ room for maneuver is limited. With midterm elections looming, such risks could also impact the globally dependent world economy. Geopolitical tensions (trade wars, aggressive supply chain manipulation, or direct conflicts) further underscore the relevance of a stagflation shock prospect.
Key Questions and Answers
- What is the central scenario for the U.S. economy in 2026? A relatively strong economy driven by AI investments, with robust business dynamism and resilient consumers, supported by expansive fiscal and monetary policies.
- What are the international implications of this scenario? The U.S. economy outperforms other major economies, with the eurozone and the UK experiencing low growth and investment, while China’s slow modernization adds to global economic risks.
- What are the extreme scenarios and their probabilities? Extreme scenarios have roughly equal probabilities. An optimistic scenario involves accelerating, non-inflationary growth driven by rapid AI adoption. A pessimistic scenario features increased volatility due to financial instability, misguided policies, and geoeconomic factors.
Author: Mohamed A. El-Erian, former Rector of Queen’s College at the University of Cambridge, is a Practice Professor at the Wharton School of the University of Pennsylvania and a Senior Global Fellow at the Lauder Institute. He is Allianz’s Chief Economic Advisor, President of Gramercy Funds, and author of “The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse” (Random House, 2016) and co-author (with Gordon Brown, Michael Spence, and Reid Lidow) of “Permacrisis: A Plan to Fix a Fractured World” (Simon & Schuster, 2023).
