United States: Sideways growth with stagflation risks – TD Securities

TD Securities strategists expect United States (US) output growth to move sideways in 2026, with their Gross Domestic Product (GDP) tracker at 2.5% quarter-on-quarter annualized and full-year growth slightly below trend at 2.1% Q4/Q4. They see a still-low 4.3% unemployment rate by late 2026, but warn that the Iran-related Oil shock and higher input costs pose stagflationary and recession risks.

Growth stabilizing but below trend

"All in, data seem to be looking up in the middle of Q3 after a less auspicious showing in July. Indeed, as a result our GDP growth tracker moved 0.4pp higher over the past week to 2.5% q/q AR, which would represent an improvement vs output growth in Q2."

"We expect output growth to move sideways this year, reflecting the lingering impact of the oil shock. The Iran conflict presents stagflationary risks, which we expect will keep the Fed on hold for the entire year. AI and high-income consumers have supported underlying growth."

"GDP growth will likely remain slightly below trend in 2026, ending with 2.1% Q4/Q4. Stable growth should result in a still-low unemployment rate of 4.3% by Q4 2026. The labor market has signaled stabilization, and while we expect that to continue, rising input costs from the oil shock create further uncertainty that could weigh on hiring."

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

"The outlook will be fluid amid uncertainty around developments in Iran and the Trump administration's execution of new trade, fiscal, regulatory, and immigration policies. New developments in financial markets and further escalation of geopolitical conflicts remain key risks for our economic projections over the forecast horizon."

"Core PCE inflation is expected to hit the Fed's strike zone for a second consecutive report in July, despite picking up to 0.24% m/m. Headline prices likely rose by a tamer 0.15%. More importantly, we expect the market-based core PCE to stay contained at 0.13% m/m.

Separately, weak retail sales data point to slowing in consumer spending to 0.2% m/m in July and a softer 0.1% in real terms. We look for gradual disinflation to resume in 2027."

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