United States: Sideways growth and sticky inflation – TD Securities

TD Securities economists Oscar Munoz and Eli Nir expect US output growth to move sideways in 2025 as the lingering Oil shock and Iran conflict create stagflationary risks, keeping the Fed on hold. They see GDP growth slightly below trend in 2026, with 2.1% Q4/Q4, unemployment near 4.3%, and only gradual disinflation resuming in 2027.

Sideways growth with stagflationary risks

"We expect output growth to move sideways this year, reflecting the lingering impact of the oil shock. The Iran conflict presents stagflationary risks, which we expect will keep the Fed on hold for the entire year. AI and high-income consumers have supported underlying growth."

"GDP growth will likely remain slightly below trend in 2026, ending with 2.1% Q4/Q4. Stable growth should result in a still-low unemployment rate of 4.3% by Q4 2026. The labor market has signaled stabilization, and while we expect that to continue, rising input costs from the oil shock create further uncertainty that could weigh on hiring."

"We assign 25% odds to a US recession over the next year."

"With supply chains stressed, we do not see substantial disinflation as feasible this year. We expect core CPI inflation to be 2.6% y/y in Q4 2026, ending the year higher than it started. The numbers are similarly high in core PCE terms (see table below)."

"Most of the impact of higher oil prices will filter into headline inflation. We look for gradual disinflation to resume in 2027."