US economic outlook June 2026

An economy in transition

• „ Resilience tested: The economy remains resilient, but the foundation of growth has become narrower. Interest-rate-sensitive sectors continue to struggle under elevated financing costs, while an income squeeze driven by slower wage growth and higher inflation is constraining consumer spending. Business investment has strengthened, supported by AI-related capital spending, but housing activity remains in the doldrums. Easing Middle East tensions and lower oil prices represent an upside risk to growth and a downside risk to inflation, but the drag from higher input and energy costs and elevated interest rates will likely continue to cap consumer and business spending.
  
  
• We expect only a gradual normalization in energy supply conditions, with oil prices likely to remain above pre-conflict levels through year-end. Against that backdrop, we continue to anticipate a slow-growth, sticky-inflation environment, with real GDP growth of 1.8% this year and 1.9% in 2027.
  
  
• Inflation acceleration: Inflation pressures are becoming broader and more supply-driven. In the coming months, higher fertilizer costs are likely to contribute to food price inflation, while rising transportation and production costs should increasingly pass through to goods and services prices. The capital-intensive AI investment boom is also contributing to price pressures in data center construction, electricity demand and specialized technology inputs, reinforcing broader supply-side inflation pressures. While the signing of a memorandum of understanding between the US and Iran has helped ease energy prices and should moderate headline inflation in the second half of the year, core inflation is likely to remain uncomfortably firm as lingering supply-side pressures slow the disinflation process.
  
  
• Steady labor market: Following a period of labor market weakness through 2025, employment conditions appear to have stabilized, with job growth rebounding in recent months. Hiring remains highly selective, but the steady unemployment rate reflects labor demand keeping pace with constrained labor supply amid aging demographics and lower net migration. We expect payroll growth to average around 70,000 per month in 2026, with the unemployment rate drifting modestly higher.
  
  
• Income squeeze: Household purchasing power remains under pressure. Inflation continues to outpace nominal wage growth, resulting in a real income squeeze. A positive wealth effect from rising equity markets continues to support spending among affluent households. As budgets tighten, a growing number of consumers are relying on savings and credit to sustain spending — a dynamic that may become increasingly difficult to maintain. Consumer spending has remained resilient, but momentum is likely to soften in the second half of the year.
  
  
• Fed turns more hawkish: The June Federal Open Market Committee (FOMC) meeting marked Kevin Warsh's debut as Fed Chair. His influence was immediately evident in a broader shift toward shorter statements and press conferences, greater policy discretion, and a communication framework that places less emphasis on signaling future policy moves. The latest dot plot points to growing concern about upside inflation risks, with nine policymakers now expecting between one and three rate hikes this year. In the coming weeks, we expect several Federal Reserve officials to emphasize more forcefully that additional policy tightening remains possible should inflation prove more persistent than anticipated. Still, with inflation expectations anchored, real wage growth under pressure and financial markets doing some of the tightening for the Fed, our baseline remains that the FOMC stays on hold through year-end.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.