[Blog] Caution Regarding Central Economic Forecasts for 2026

Title: [Blog] Caution Regarding Central Economic Forecasts for 2026

Content: In statistical terms, the upcoming year presents a multi-modal distribution of possibilities. A feasible trajectory of strong, AI-driven growth lies at the center, with a miraculous productivity increase on one side and a risk-heavy, bond market-driven decline on the other. Investors and policymakers need to brace themselves for all these potential outcomes.

NEW YORK – Making a central prediction for the US economy in 2026 seems straightforward. However, the likelihood of this baseline scenario actually happening is probably below 50%. The typical bell curve has been replaced by one featuring unusually “fat tails,” indicating substantial probabilities for both extreme positive and negative outcomes. The US economy is not solely on a linear path but rather engaged in a tense tug-of-war among three distinct futures: a central baseline that is moderately favorable, a productivity-boosted optimistic scenario, and a volatile pessimistic outlook.

The central scenario envisions a relatively robust economy that continues to defy expectations of a cyclical downturn, gradually gaining strength primarily due to significant AI investments. By next year, the US will shift from the current infrastructure phase of the AI revolution—characterized by rapid data center and hardware development—towards deeper integration. Capital expenditures will remain historically high, driven by the dual imperative of working both “on” and “with” AI.

This corporate dynamism is complemented by a still-resilient consumer base, bolstered by accommodating fiscal and monetary policies. The American household has proven to be a sturdy engine of growth, albeit one that is weakening. With fiscal spending ongoing and the Federal Reserve likely to lower interest rates, it may continue to thrive, despite soaring prices that heavily impact lower-income households. Nevertheless, persistent inflation will remain a reality. Although price increases may not be severe enough to unanchor expectations, they are likely to stay above the Fed’s target, preventing a complete return to the ultra-low interest rates seen in the 2010s.

This scenario also highlights an unsettling trend: the decoupling of employment from GDP. Historically, robust economic growth has been closely tied to strong job creation. However, this relationship is under strain, suggesting that growth in 2026 may occur alongside a stagnant labor market. Such growth without job creation would exacerbate the K-shaped nature of economic performance, keeping affordability a significant social and political issue and ensuring inequality remains a central topic in national discussions.

This central scenario encompasses a considerable amount of “dispersion,” not just domestically but internationally as well. The US significantly outperforms other major economies, while the eurozone and the UK remain ensnared in a low-growth, low-investment equilibrium due to structural inflexibilities. As China’s attempts to upgrade its growth model progress slowly, the US will continue to serve as the world's primary economic engine—this concentration brings its own set of risks.

On the “fat tail” scenarios, the probabilities are roughly equal, offering both hope and concern. On the optimistic side, there exists a compelling vision of an economy that accelerates rather than just grows, simultaneously expanding future capacity. In this scenario, faster-than-expected adoption of AI, coupled with advancements in robotics, translates into substantial productivity gains across the economy, allowing the US to gain an even greater advantage over other major economies.

If this “productivity promise” manifests swiftly enough, the US could experience a non-inflationary boom. As supply rapidly expands to meet rising demand, inflation remains controlled. This scenario represents a Goldilocks situation enhanced: a technology-driven expansion that boosts corporate margins and increases tax revenues, potentially easing fiscal pressures and allowing the Fed to implement more aggressive rate cuts.

Conversely, equally probable is the downside scenario—not a typical recession stemming from depleted demand but a surge in volatility resulting from financial instability, policy missteps, election-year politics, and global economic developments. A significant risk lies within the bond market. With US deficits still substantial, debt service costs escalating, and AI-related investments needing further financing, bond vigilantes could re-emerge. A sudden spike in yields could destabilize the financial system, undermining economic activity far beyond America’s borders. Events in the US Treasury market rarely stay within its confines.

This financial fragility is heightened by the risk of policy errors—whether in fiscal measures or monetary policies—at a time when policymakers' flexibility is already limited. With midterm elections approaching, this risk could also have repercussions for a global economy heavily reliant on the US. Coupled with geopolitical tensions such as trade wars, supply chain weaponization, or direct conflict, the possibility of a stagflationary shock becomes more pronounced.

As we enter 2026, we must not allow a reassuring central forecast to foster complacency. Statistically, we are not facing a normal distribution, but rather a multi-modal one: a plausible trajectory of strong, AI-driven growth sits in the center, flanked by a miraculous productivity increase on one side and a risk-laden decline on the other. Investors and policymakers must prepare for all these outcomes and the significant dispersion among countries, sectors, and households that links them.