U.S. economic momentum shifts, but growth continues

The U.S. economy entered the second half of 2026 on a steady growth path. Real gross domestic product, or GDP, grew at a 1.5% annualized rate in the second quarter and 2.1% from a year earlier, according to the Bureau of Economic Analysis. GDP measures the value of goods and services produced across the economy, and both readings point to continued expansion.

Consumer spending accounts for roughly 69% of economic activity, while business investment represents about 19%; trade and government spending make up the balance. ¹ Income, employment, credit and tax policy shape household demand and corporate investment decisions. Together, those conditions support continued growth, while inflation and elevated interest rates create clear risks to the outlook and investment markets.

Are we going into a recession? U.S. economic growth says not yet

A recession involves a broad, sustained decline across economic activities, not a single weak employment report, retail sales figure or quarter of GDP growth. Two consecutive quarters of falling GDP provide a common shorthand, but the National Bureau of Economic Research evaluates the breadth, depth and duration of a downturn across several measures. Recent data instead describe an economy growing at a moderate pace.

Slower growth does not automatically signal a recession. Risk rises when weakness endures and spreads across employment, incomes, production and sales, creating a cycle in which reduced spending leads businesses to cut investment and jobs. Investors therefore need to evaluate a pattern of reports over time rather than treat one disappointing release as proof that a downturn has begun.

A renewed energy shock would lift inflation, a sustained decline in hiring would slow income growth, and restrictive interest rates would weigh further on housing and other activities that rely heavily on borrowing. Each pressure affects a different part of the economy. A downturn becomes more likely when those pressures reinforce one another.

Consumer spending and the labor market support economic growth

Consumer spending is the economy’s largest engine. Personal spending increased 5.9% from a year earlier in July before adjusting for inflation, while wages and salaries rose 3.7%, according to the Bureau of Economic Analysis. Income growth gives households more capacity to absorb higher prices and continue spending, although that support varies across income groups.

The labor market adds to that support. The July unemployment rate stands at 4.1%, and the four-week average of initial unemployment claims was 205,500 for the week ended August 22, both consistent with limited layoffs. ^2, 3 Continued employment and wage income provide a firmer foundation for spending than confidence surveys convey.

Household finances nevertheless differ by income and wealth. Higher-income consumers benefit more from accumulated savings and gains in financial assets, while lower- and middle-income households devote a larger share of income to 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, summarizes the split: “Consumer spending remains solid, even as high interest rates and higher costs put more pressure on lower- and middle-income households.”

Tax policy extends consumer and business momentum

Fiscal policy provided additional support during the 2026 filing season. Tax refunds exceeded 2025 levels by about $62 billion as of August 27, returning additional cash to households just as the Iran conflict escalated gas prices. ¹ The larger refunds have helped consumers offset some of the pressure from higher energy prices.

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 and artificial intelligence support U.S. economic growth

Business investment expands the economy’s productive capacity and creates revenue for technology, industrial, construction and service companies. Firms continue to spend on equipment, facilities, software and intellectual property, while artificial intelligence, domestic manufacturing and electrification add longer-term demand. Economists and companies often call this spending capital expenditures, or capex, because it purchases assets expected to support operations for several years.

Credit conditions support that ongoing investment. Commercial and industrial loans increased 9.5% from a year earlier as of August 12, showing continued demand from borrowers and continued credit availability from banks. ¹ Companies generally borrow when they expect a project’s return to exceed its financing cost.

Artificial intelligence investment illustrates both the opportunity and the risk. Large cloud-computing companies are building data centers, buying semiconductors and expanding power infrastructure, creating demand across a broad supply chain. Investors still need to distinguish spending growth from profitable growth because heavy borrowing and uncertain returns increase credit and financing risk if the projects do not generate sufficient cash flow.

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 provide another view of the outlook. A credit spread measures the extra yield investors demand to own a corporate bond instead of a comparable U.S. Treasury security. Narrow spreads generally indicate confidence in companies’ debt repayment capacity, while a rapid widening signals expectations for weaker profits 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 keeps Federal Reserve interest rate policy cautious

The Federal Reserve (Fed) sets short-term interest rates to pursue maximum employment and stable prices. Inflation remains above the Fed’s 2% objective, limiting the case for rate cuts as the economy expands. Energy prices lift inflation quickly, while housing and other services often determine whether price pressures persist.

Investors have shifted from expecting rate cuts early in 2026 to considering the possibility of higher policy rates. The Fed held its target rate at 3.50% to 3.75% in July, while market prices indicate expectations for at least one 0.25% increase by year-end. Because those expectations change with each inflation and employment report, portfolios built around a precise Fed forecast remain vulnerable to abrupt shifts in interest rates and asset prices.

Higher rates affect the economy and portfolios through several channels. They 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, but interest-sensitive areas are important sources of risk.

Market outlook: Growth supports earnings, while risks favor diversification

Continued economic growth supports corporate revenue and earnings, which in turn support 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 principal risks connect directly to that investment outlook. They include a larger energy shock or renewed inflation keeping interest rates high, sustained labor market weakness slowing revenue growth, and earnings below expectations pressuring stocks with demanding valuations. High-quality bonds provide income and diversification, while broader exposure across stock markets and other assets 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 your portfolio when markets move sharply, while adequate liquidity reduces the need to sell long-term investments at an unfavorable time. A review with a wealth management professional can help keep your plan aligned with those objectives as recession risk, inflation or 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.