U.S. economic momentum shifts, but growth continues

The U.S. economy entered the second half of 2026 with solid momentum. Real gross domestic product, or GDP, grew at a 2.2% annualized rate in the second quarter after a revised 2.5% increase in the first quarter, according to the Bureau of Economic Analysis. GDP measures the value of goods and services produced across the economy, and the latest estimate shows continued expansion led by consumer spending, investment, and exports.

Consumer spending and business investment remain the main sources of growth. Real final sales to private domestic purchasers, which combine household spending and private fixed investment, rose at a 4.6% annualized rate in the second quarter. The measure provides a clearer view of domestic demand by excluding swings in inventories, exports, and government spending.

Are we going into a recession in 2026? Economic growth remains positive

A recession marks a broad, sustained decline in economic activity, not one weak jobs report, spending release, or quarter of GDP data. Two consecutive quarters of falling GDP offer a familiar shortcut, but the National Bureau of Economic Research examines the depth, duration, and reach of weakness across employment, income, production, and sales. Current data instead show moderate growth, rising payrolls, and continued household demand.

Slower growth alone does not establish that the U.S. is in a recession. Risk rises when weakness persists across employment, incomes, production, and sales, prompting households to spend less and businesses to cut investment and jobs. A pattern of reports over time provides more information than one disappointing release.

An extended energy shock could lift inflation, a sustained decline in hiring could slow income growth, and restrictive interest rates could weigh further on housing and other borrowing-dependent activity. Each pressure affects a different part of the economy. A downturn becomes more likely when those forces reinforce one another.

Consumer spending and jobs lower near-term recession risk

Consumer spending remains the economy’s largest engine. In August, personal consumption expenditures rose 0.9% before adjusting for inflation and 0.6% after inflation, while disposable personal income increased 0.3%, according to the Bureau of Economic Analysis. The 4.1% personal saving rate gave households some financial cushion even as higher prices affected budgets unevenly.

The labor market continues to support household demand. Employers added 162,000 jobs in August, and the unemployment rate held at 4.1%, according to the Bureau of Labor Statistics. Stable employment and wage income provide a stronger foundation for spending than changes in consumer confidence alone.

Household finances still vary widely by income and wealth. Higher-income consumers often have more savings and financial assets, while lower- and middle-income households spend a larger share of income on essentials and face greater exposure to food, energy, and borrowing costs. Bill Merz, head of capital markets research for U.S. Bank Asset Management Group, describes the divide this way: “Consumer spending remains solid, but high interest rates and elevated costs continue to put greater pressure on lower- and middle-income households.”

Tax policy extends consumer and business momentum

Fiscal policy strengthened household cash flow during the 2026 filing season. Tax refunds exceeded 2025 levels by about $63 billion as of September 30, returning additional cash to households as the Iran conflict pushed gas prices higher. ¹ The refunds helped consumers absorb part of the increase in energy costs earlier this year, but this cushion is unlikely to persist due to energy prices that have remained high.

Recent tax changes also encourage companies to invest. More favorable deductions for interest expense and immediate deductions for qualifying capital purchases lower the after-tax cost of equipment, facilities, and technology. The incentives improve expected returns and bring planned spending forward when companies see sufficient demand for new projects.

Business investment, bank lending, and artificial intelligence drive growth

Business investment expands productive capacity and generates revenue for technology, industrial, construction, and service companies. Firms continue to invest in equipment, facilities, software, and research, while artificial intelligence, domestic manufacturing, and power infrastructure create longer-term demand. Economists often call this capital spending, or capex, because companies purchase assets expected to serve operations for several years.

Bank lending reinforces that investment. Commercial and industrial loans grew 10.1% year over year in August, according to Federal Reserve data. Monthly lending changes fluctuate, but the broader increase shows that businesses continue to seek financing and banks continue to supply credit.

Artificial intelligence investment creates opportunity across the supply chain while raising the standard for success. Large cloud-computing providers are building data centers, buying advanced chips, and expanding power systems, creating demand for technology, industrial, and utility companies. Heavy borrowing increases financing risk when projects fail to generate enough cash flow to cover interest costs and earn an acceptable return.

How U.S. economic growth affects stocks and bonds

The economy and financial markets often move in different directions over short periods because asset prices reflect expectations about the future. Over longer periods, household and business demand shape corporate revenue, while productivity and cost discipline determine how much revenue becomes profit. Strong earnings support stock prices, but elevated valuations and optimistic forecasts leave less room for companies that fall short.

Bond markets offer another view of the economy. A credit spread is the extra yield a company pays compared with a U.S. Treasury security that has a similar maturity. Narrow spreads generally signal confidence in companies’ ability to repay debt, while a sharp and sustained widening signals expectations for weaker profits, tighter credit or more defaults.

Longer-term Treasury yields respond to expected economic growth, inflation, and government borrowing. Faster nominal growth, which combines growth in economic output and prices, pushes yields higher when investors demand compensation for inflation and competing uses of capital. Higher yields raise financing costs for households and businesses, but they also improve the income available from many high-quality bonds.

Inflation and Federal Reserve interest rates shape the 2026 outlook

The Federal Reserve sets short-term interest rates to support maximum employment and stable prices. The personal consumption expenditures price index rose 3.4% from a year earlier in August, while the measure excluding food and energy increased 3.0%. Both readings remain above the Fed’s 2% goal, giving policymakers reason to keep borrowing costs elevated even as the economy expands.

In September, the Fed raised its target rate by 0.25 percentage points to a range of 3.75% to 4.00%. The decision reversed part of the earlier easing cycle as officials responded to resilient demand and inflation above target. Incoming inflation and employment data will determine future policy, so portfolios built around one precise rate forecast remain vulnerable to abrupt market shifts.

Higher rates slow housing, vehicle purchases, and debt-funded business projects, while higher bond yields provide stronger competition for investor capital than they did when yields were lower. Continued loan growth and business spending show that elevated rates have not stopped the expansion. Housing and other parts of the economy that depend heavily on borrowing remain important sources of risk.

2026 market outlook: Growth drives earnings, while risks favor diversification

Continued economic growth drives corporate revenue and earnings, providing a foundation for the stock market. Strong margins show that many companies have converted demand and productivity gains into profit, helping stocks reach record highs in 2026. A selective equity allocation participates in that growth while recognizing that strong performance and high earnings expectations increase the consequences of disappointment.

The main risks follow directly from this outlook. Another energy shock or persistent inflation could keep interest rates high, prolonged labor-market weakness could slow corporate revenue, and disappointing earnings could pressure richly valued stocks. High-quality bonds provide income and diversification, while broad exposure across markets and asset types reduces reliance on one company, sector, or economic outcome, although diversification does not guarantee gains or prevent losses.

Investors do not need a perfect economic forecast to make sound decisions. A target allocation tied to goals, time horizon, and risk tolerance provides a framework for rebalancing when markets move sharply, while adequate liquidity can reduce the need to sell long-term investments at an unfavorable time. A review with a wealth management professional can keep your plan aligned with those objectives as recession risk, inflation, and Federal Reserve policy expectations change.

How to evaluate the health of the U.S. economy

Investors should consider several economic indicators when assessing current economic conditions. These include data on gross domestic product (GDP) growth, inflation, the unemployment rate and other labor market indicators, consumer and business spending, and interest rates. A healthy economic scenario often includes rising GDP, low unemployment, and stable inflation near the 2% level. A simple rule of thumb for a recession is two consecutive quarters of GDP contraction, often accompanied by a weak labor market, such as rising unemployment.

How economies move through expansion, slowdown, and contraction

The economic cycle (or business cycle) tends to move through stages. The expansion phase features rising Gross Domestic Product (GDP), low unemployment, and rising consumer activity. Rising inflation (reflected in increased cost-of-living) may also result. During the economic cycle, activity eventually peaks and a slowdown begins with slower GDP growth. In some cases, that slowdown leads to a recession, where GDP contracts for a period of time. The lowest point of the economic cycle, a trough, is followed by an economic recovery, where GDP again moves into positive territory.

How economic conditions can shift over time

Several factors can influence economic growth through a cycle. These include Federal Reserve monetary policy, particularly the decision to raise or lower interest rates; policies that favor narrow groups of industries rather than the broad economy; and external pressures such as elevated inflation or geopolitical conflicts. These variables can alter the economic environment, often in unpredictable ways.

Note: Diversification and asset allocation do not guarantee returns or protect against losses. The Standard & Poor’s 500 Index (S&P 500) consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general. The S&P 500 is an unmanaged index of stocks. It is not possible to invest directly in the index. Past performance is no guarantee of future results.

FAQs

What is a recession?

What is a recession? A recession is a broad and sustained decline in economic activity. People sometimes use two straight quarters of falling GDP as a quick rule of thumb, but that shortcut can miss important details. In the U.S., the National Bureau of Economic Research weighs several measures, including jobs, production, income, sales, and GDP, and it often makes its determination after a downturn has already begun.

When was the last recession?

When was the last recession? The most recent recession began with the COVID-19 shock in early 2020. It lasted only a few months, but it was severe because shutdowns quickly disrupted work and spending. The prior recession was the 2007–2009 period tied to the financial crisis.

Is a recession coming in 2026?

No one can predict recessions with certainty, and the economy can change quickly. Today’s data still show growth and ongoing consumer spending, which generally lowers near-term recession risk. The key things to watch include job trends, credit conditions, and whether inflation stays high enough to keep interest rates restrictive for longer.