Deutsche Bank-US Economic Perspectives 2026 outlook Keep on rockin in t...-119018984

T2se3r0Ot6kwoPaT2se3r0Ot6kwoPaDistributed on: 24/11/2025 17:13:54 GMTDistributed on: 24/11/2025 17:13:54 GMTDeutsche Bank Research Deutsche Bank Securities Inc. IMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATIONS LOCATED IN APPENDIX 1. UNTIL 19th MARCH 2021 INCOMPLETE DISCLOSURE INFORMATION MAY HAVE BEEN DISPLAYED, PLEASE SEE APPENDIX 1 FOR FURTHER DETAILS. Economics US Economic Perspectives Date 24 November 2025 2026 outlook: Keep on rockin' in the not so risk-free world ▪ After a tumultuous year, we see the US economy on more stable footing in 2026. With some headwinds fading (e.g., trade policy uncertainty) and tailwinds strengthening (e.g., tax cut boost to household income and lower tariff rates), we expect growth to pick up next year to 2.4% (ann/ann and Q4/Q4). Further out, our forecast anticipates growth remaining in the 2-2.25% range in 2027 and 2028. ▪ Despite solid growth, the labor market remains vulnerable. Our baseline is that the unemployment rate will peak near 4.5% before declining marginally in H2, as a less uncertain backdrop allows hiring to stabilize amidst reduced labor supply. But risks are skewed to the downside, given the potential for layoffs to rise, perhaps motivated in part by AI adoption. ▪ Disinflation should resume in H2 2026, helped by lower tariff rates and shelter. We have lowered our year-end forecast for core PCE by two-tenths to 2.4%. However, a resilient economy, persistent supply side shocks, and a structurally more dovish Fed reaction function are likely to prevent the last mile of disinflation. We now see core PCE inflation around 2.25% in 2027 and 2028. ▪ Solid growth, stabilizing hiring and above-target inflation are likely to keep the Powell-led Fed on hold in early 2026 after delivering a 25bp cut in December. We then see the Fed cutting again in September under new (more dovish) leadership as disinflation resumes over the back half of the year. This implies a trough in the fed funds rate at 3.3%, just below our unchanged estimate of neutral (3.5-3.75%). Balance sheet growth is likely to resume in Q1, as the Fed restarts reserve management purchases to keep reserves ample. ▪ Despite this relatively constructive baseline outlook, risks abound. Recession probabilities are somewhat elevated, given uncertainty about the outlooks for labor demand and supply. AI presents two-sided risks to the outlook – the potential to weaken employment further while boosting productivity gains. Market concerns around Fed independence or fiscal sustainability could also reemerge, particularly if court rulings allow the removal of Governor Cook (for the former) and strike down the President's IEEPA powers (for the latter). Summary After a tumultuous year, we see the US economy on more solid footing in 2026. With some headwinds fading (e.g., trade policy uncertainty) and tailwinds strengthening (e.g., tax cut boost to household income), we expect growth to pick Matthew Luzzetti, Ph.D. Chief US Economist +1