The US economy is poised for stronger performance this year than many economists are projecting, according to Goldman Sachs Research.
“Our strongest conviction views for 2026 are our above-consensus GDP growth forecast and our below-consensus inflation forecast,” writes David Mericle, chief US economist, in the team’s report. “The outlook for the labor market is more uncertain—we expect it to stabilize but see the possibility of further softening as the key risk for 2026.”
What’s the forecast for US economic growth in 2026?
US GDP is projected to expand 2.5% in 2026 (fourth quarter, year over year), versus the consensus economist estimate of 2.1%, according to Goldman Sachs Research. On a full-year basis, the economy is forecast to grow 2.8%. The probability of a recession in the next 12 months has fallen from 30% to 20%. All forecasts are as of January 11.
The key driver for Goldman Sachs Research’s forecast for solid growth this year is that the drag from tariff increases should give way to a boost from business and personal tax cuts included in the One Big Beautiful Bill Act.
“Tax cuts, real wage gains, and rising wealth should sustain solid consumer spending growth,” Mericle writes. “New tax incentives, easier financial conditions, and reduced policy uncertainty should boost business investment.”
At the same time, the composition of GDP expansion in the years ahead will look different than during the last economic cycle. More of the expansion is expected to come from productivity growth, which has rebounded and should receive a boost from artificial intelligence (AI), Mericle writes. Labor supply growth, with immigration now much lower, will account for less of the economy’s expansion.
What’s the outlook for US inflation this year?
Core personal consumption expenditures (PCE) inflation is estimated to fall to 2.1% by December (year over year) and core CPI to fall to 2%. Goldman Sachs Research’s inflation forecasts are 0.3 percentage point below consensus estimates, the Federal Open Market Committee’s (FOMC) forecasts, and market pricing.
“We are confident in part because we think there was actually meaningful progress” on declining inflation in 2025 that was masked by a moderate one-time boost from tariffs that should fade this year, Mericle writes.
While progress on core PCE inflation has stalled at 2.8% year-over-year, Goldman Sachs Research estimates that passthrough from tariffs to consumer prices has contributed 0.5 percentage point, primarily in goods categories. This implies that inflation excluding the one-time effect of tariffs has already fallen to 2.3%.
The team also expects labor market rebalancing and the exhaustion of catch-up inflation to drive inflation toward the Federal Reserve’s target this year. Catch-up inflation refers to prices that adjust with a longer lag and therefore keep rising at a faster pace until they have caught up.
“In fact, the two most valuable indicators for forecasting inflation further ahead—the state of the labor market and leading indicators of rent inflation—now point to lower inflation than they did late last cycle,” he adds. As the labor market rebalances, Goldman Sachs Research’s wage growth tracker has fallen by more than 2 percentage points to 3.5%.
Will the US job market get better in 2026?
Goldman Sachs Research expects the unemployment rate to stabilize at 4.5%. But there are several risks: the starting point for job growth is weak and narrow, job openings have continued to slowly trend lower, and companies are increasingly discussing layoffs and are eager to use AI to reduce labor costs.
“We see the labor market as the most uncertain piece of the 2026 outlook,” Mericle writes. “We see a period of jobless growth similar to the ‘jobless recovery’ of the early 2000s as a plausible alternative scenario.”
Much, but not all, of the decline in job growth in 2025 reflected a decrease in labor supply growth caused by the dramatic drop in immigration, according to Goldman Sachs Research. The economy is now estimated to need fewer than 70,000 jobs per month for the unemployment rate to hold steady in 2026.
However underlying trend job growth, estimated by Goldman Sachs Research at 11,000 per month, has fallen below even that modest breakeven rate. “The gap between job growth and labor supply growth led to a renewed modest rise in the unemployment rate last year,” Mericle writes.
At the same time, recent employment reports have shown a small first step toward labor market stabilization, he says. Goldman Sachs Research’s baseline forecast is that a somewhat better economic and policy environment will be enough to boost hiring and stabilize the labor market.
Is AI causing layoffs?
In the meantime, companies are increasingly discussing layoffs and appear eager to use AI to reduce labor costs. “Because AI does not seem to have been a major driver of the decline in job growth so far, an increased reluctance to hire in anticipation of AI being able to replace workers in the near future would represent a new obstacle to maintaining full employment,” Mericle writes.
The team notes that, in the past, faster technological progress has tended to lead to somewhat higher job turnover and consequently somewhat higher unemployment. But the rise in productivity growth from faster technological change has also tended to temporarily push down inflation, giving the Fed the scope to keep its funds rate a bit lower to support the job market through these transitions.
How much will the Fed cut rates in 2026?
Goldman Sachs Research predicts that the Fed will deliver rate cuts of 25 basis points each in June and September and that the fed funds rate will finish this cycle at 3%-3.25%.
“Lower inflation would resolve one source of disagreement among Fed officials, but they will likely still have a range of views on the appropriate terminal rate,” Mericle writes. “We expect them to meet in the middle.”
