Monthly Economic Outlook

Growth: Economic activity to moderate. Q3 GDP is estimated at 3.1% (quarter-over-quarter annualized), supported by resilient retail sales and healthy capital spending, with full-year 2025 growth now at 2.0%. We expect somewhat softer but steady growth of 1.9% in 2026, as still-high prices and job concerns slow, not topple, expansion.

Labor market: Stability on the surface, fragility underneath. Hiring has slowed but the unemployment rate is still low at 4.4% in September and is projected to peak at 4.7% by early 2026 – driven by reduced labor market dynamism, restrictive immigration and business caution amid policy uncertainty shaping next year’s business plans.

Consumer: Resiliency challenges ahead. Spending remained solid through Q3 as strength in services helped offset slower goods consumption – pressured by tariff-related pricing pressure and high borrowing costs. Real-time October retail data points to continued moderation into fall, concentrated in essential ‘must have’ items – particularly among lower-income consumers. High income households continue to drive a disproportionate share of overall spending, particularly in discretionary categories, supported by record high equity prices.

Inflation: Price pressures remain elevated. Core PCE inflation, currently at 2.8% year-over-year (YoY), is expected to climb to 3.1% in the first half of 2026, driven by tariff-related goods inflation and firm non-housing services costs, before gradually easing toward the Fed’s 2% target.

Fed: Monetary policy remains cautious and divided. Following October’s rate cut to 3.75-4.00%, the Fed is signaling another likely reduction in December amid concerns over labor market softness despite sticky inflation. The disappointing November ADP report may temper hawkish dissent. We expect a gradual path toward a neutral rate of 3.25% by the end of 2026.