Monthly Economic Outlook
Economic forecast: May 2026 trends and analysis
Macroeconomic insights and outlook from the U.S. Bank Economics Research Group to help guide your business strategy
May 2026
Economic outlook at a glance
Oil’s well – for now
Our May 2026 U.S. economic outlook centers on an economy that remains resilient but increasingly constrained by higher prices and thinning buffers. A renewed energy shock is lifting headline inflation and weighing on real incomes, even as underlying domestic demand remains constructive, and the labor market cools in an orderly fashion. Growth has slowed to a more sustainable pace, supported by steady private sector demand, with consumers continuing to spend through savings drawdowns and balance sheet flexibility rather than rising job losses.
At the same time, near‑term inflation pressures have firmed, largely reflecting energy pass‑through and tariff‑related goods pressures – leaving the Federal Reserve firmly in a patient, risk management mode. With labor conditions broadly stable and long‑run inflation expectations still anchored, policymakers are prioritizing credibility over preemptive easing as they assess whether recent inflation impulses fade. In this environment, our base case remains continued normalization rather than recession – slower but positive growth, a labor market characterized by defensive stability, and eventual disinflation that opens the door to policy easing once clearer, sustained progress on core inflation reemerges.
Key takeaways:
Growth: We forecast real GDP growth of 2.2% on a Q4-over-Q4 basis in 2026 (2.3% annual average), with headline growth moderated by the impact of higher energy prices and firmer inflation but underlying domestic demand remaining constructive. Consumer spending slows modestly as real purchasing power is pressured, yet strength in AI‑related investment, productivity gains and a rebound in government spending keep the expansion on a stable, albeit slower, footing rather than stalling.
Labor market: Conditions continue to normalize without unraveling. We expect the unemployment rate to drift modestly higher toward ~4.6% by late 2026, as hiring remains subdued amid slower labor force growth. Recent indicators – volatile payrolls, low hiring rates and historically low jobless claims – continue to point to a ‘low‑hire, low‑fire’ equilibrium. This supports near‑term stability but leaves the labor market increasingly sensitive to adverse shocks.
Inflation: Inflation pressures have firmed in the near term, reflecting energy pass‑through and tariff‑related goods pressures, even as underlying disinflationary forces remain intact. We expect core Personal Consumption Expenditures (PCE) inflation to peak in Q2 2026 around 3.3% on a year-ago basis, before easing gradually toward the Fed’s 2% goal by the start of 2028, as goods prices normalize, shelter continues to cool and wage growth moderates.
Federal Reserve: The Fed remains firmly on hold, with recent communications reinforcing a cautious, risk management posture amid firmer inflation and elevated energy-related uncertainty. With labor conditions broadly stable and inflation progress uneven, policymakers are increasingly reluctant to pre-commit to near-term easing. We continue to expect two 25 basis point (bp) rate cuts – in December 2026 and June 2027 – leaving the terminal policy rate unchanged at 3.00%–3.25%.
Risks
Downside risks have moderated, and we have lowered our 12‑month recession probability to 30%, reflecting resilient incoming data, continued labor market stability, and easing concerns around Middle East disruptions. While the baseline remains slower growth rather than contraction, risks persist. Sustained energy inflation, thinner household buffers and policy uncertainty could still test the expansion if pressures intensify or conditions deteriorate more abruptly.
Macroeconomics forecast at a glance
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Sources: U.S. Bank Economics, Bloomberg, Yale Budget Lab, U.S. Bank Economics calculation
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U.S. Bank Economics Research Group
Beth Ann Bovino
Chief Economist
Ana Luisa Araujo
Senior Economist
Matt Schoeppner
Senior Economist
Adam Check
Economist
Andrea Sorensen
Economist
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