US: Growth cooling back to potential – TD Securities

TD Securities expects US GDP growth to slow to 2.3% q/q annualized in Q4 2025, down from earlier strong quarters, as consumer spending moderates, federal outlays contract and net exports drag. Over the broader horizon, output is projected to gradually return to potential, with GDP growth around 2.3% Q4/Q4 in 2026 and recession odds at 25%.

Momentum eases as policy shock bites

"GDP growth likely lost momentum in Q4, growing 2.3% q/q AR after two solid quarters. We expect the moderation to reflect slowing consumer spending, a sharp contraction in federal government outlays, and adverse net exports. We also expect AI-related investment to continue supporting nonresi fixed investment."

"This week will be highlighted by GDP and PCE on Friday where we expect a moderation in growth for Q4 along with a pickup in December PCE inflation. We will revisit our GDP forecast of 2.3% q/q AR this week after December durable goods, inventories, and trade data before the Friday release."

"We expect output growth to gradually come down to potential by the end of this year, reflecting the Trump administration's considerable trade policy shock. Monetary policy has become less restrictive as the Fed continued to recalibrate its stance in 2025 due to labor market softening. Larger tax refunds are also likely to support consumption in the first half of 2026."

"GDP growth will likely return to potential in 2026, ending with 2.3% Q4/Q4, similar to 2025. A normalization in growth should result in a lower unemployment rate of 4.2% by Q4 2026. We expect labor market stabilization to continue through the end of 2026."

"We assign 25% odds to a US recession over the next year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)