UBS Economics-Global Economic Perspectives _US 2026-2028 Outlook Bust or ...-118808975

ab11 November 2025Global ResearchGlobal Economic PerspectivesUS 2026-2028 Outlook: Bust or Boom?A new day dawns: looking ahead over the next three yearsThe economic expansion looks very narrowly driven. The fundamentals are mixed at best. A decent chunk of the US economy is in recession. Essentially the US outlook right now looks like a big bet on AI. AI-driven equity market wealth supports the consumption of upper-income households, while other households are under increasing pressure. Meanwhile, the only other part of the economy obviously growing is investment in software, computers, and peripheral equipment — again likely AI-driven. The strength is narrow and could be tenuous.
We explain our assessment of the narrow-growth starting point in more detail inside. We expect that the narrow growth is a useful paradigm for understanding equity markets, the broader economy and the labor market, and reconciling all three.
Looking out to 2026, the other tension is the support from the One Big Beautiful Bill Act (OBBBA) fighting the headwinds of the tariffs that have been put in place. We expect tariff-related headwinds to mount over the next several months before bumper tax refunds fuel better growth in the second quarter of next year.
We expect tariffs to shave roughly 0.8 pp off real GDP growth, a little over half of that during 2026. In contrast we expect the OBBBA to add 0.45 pp to growth in 2025 and 2026. Overall, with the rest of government included, fiscal policy is expected to contribute 0.3 pp in 2026 real GDP growth (Q4/Q4). The tariffs versus fiscal policy looks like a central tension of 2026.
We do not think the impact from tariffs is over. We estimate a ~1.4 pp cumulative direct impact from the tariffs on the level of the core PCE price deflator from 2025 to 2028, but the inertial process and related supply impacts would push the overall impact up to ~1.9 pp. Next year, we estimate the tariffs add 0.8 pp to core PCE inflation. We also discuss the implications of the Supreme Court case inside.
That leaves the FOMC in a tough spot, but we expect a third 2025 25 bp rate cut and two more in 2026, which would leave the target range for the federal funds rate at 3.00% to 3.25% at the end of next year.
Inside, we write essays on AI's impact on productivity, an upcoming improvement in structural labor supply, the FOMC after Chair Powell, a plan B for the Trump administration if the IEEPA tariffs are struck down by the court, and more.We are bullish longer term and estimate that we are on the cusp of an acceleration in structural growth. Key question: can the trade war damage, policy uncertainty and volatility get out of the way?This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Quantitative Research Review published by UBS, begin on page 41. EconomicsGlobalJonathan PingleEconomistjonathan.pingle@ubs.com+1-212-713 2225Alan DetmeisterEconomistalan.detmeister