2026 Mid-Year Outlook: Crosscurrents and Divergence Amidst an Increasing AI Surge

As you were recently sitting down to write our U.S. Economy and Global Economy section, what struck you as the most surprising thing versus what you had written for the year ahead outlook?

Well, a few things.

I think a good way to look at it is at the start of the year, my forecast was 2024, kind of like it was two years ago, which is 2% growth, zero recessions, inflation running at about 2%, and unemployment ending the year at about 4%.

Halfway through, I'm sort of a decade later, I'm 2-0-3-4.

I think we'll still average about 2% growth for the year.

I think we'll still avoid a recession, but for reasons which we'll get into, it looks like inflation will be hotter, so maybe 3% year-over-year on inflation by the end of the year.

And I still think the unemployment rate will come down to 4%.

And in the midst of, you know, with that changing forecast, what really moved the needle here? I think there were three things.

First of all, income tax refunds weren't quite as strong as we thought.

Now, they were up 18% in terms of the total value of refunds paid out this filing season relative to last year.

We actually thought it was going to be more than that based on the original cost estimates from the OBBBA.

So consumers got some assistance from income tax refunds, but not as strong as we thought.

And that is keeping consumer spending just a little bit slower in the middle of the year than we thought it would be.

Offsetting that, though, the AI surge has been even stronger.

I mean, we keep on updating our numbers in terms of how much the various hyperscalers are going to spend on capital spending this year.

But we're seeing these broadening ripples from this extraordinary AI splash.

And so it's not just affecting these companies.

Financials are having a very good year because of the earnings, because of a new, renewed M&A boom and IPO boom, which is pretty much related to the good stock market.

We're seeing good returns out of utilities and a lot of spending on infrastructure.

So overall, that part of the economy is doing very well.

And if you look at even in first quarter GDP, you look at the strength that we saw in investment spending on equipment and also investment spending on R&D.

I mean, those things are really powering the economy forward.

So those things are kind of offsetting.

And without this third factor, we'd still be at a 2-0-2-4 economy.

But the third factor was the war in Iran.