Kiplinger GDP Outlook: 2026 Growth Looking a Little Better
Final sales to private domestic purchasers grew by 4.6% in the second quarter.
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Strong consumer spending in August, adjusted for inflation, plus upward revisions to GDP growth in the first and second quarters (by 2.5% and 2.2%, respectively) have improved the economic outlook for the year a bit. Expect both 2026 and 2027 GDP growth to come in at 2.2%. Consumer and business spending in the second quarter remained strong, with consumption up 3.8% at an annual rate and business equipment spending up 13.4%, the latter mostly the result of heavy spending on computer chips in the artificial intelligence race. Final sales to domestic purchasers, a measure of the underlying health of the economy, rose a strong 4.6%. This measure is often used to track underlying spending momentum by excluding foreign trade and inventory changes. Foreign trade subtracted a full percentage point from GDP growth, as import growth (12.6%) outstripped export growth (5.0%). The drop in the value of inventories pulled a half percentage point of GDP growth from the second quarter. But much of this drop was the result of a decline in petroleum stockpiles, as U.S. oil and fuel exports increased sharply while imports decreased.
There are a few continued areas of weakness in spending, however. Nonresidential construction was unchanged, though this was good news after large declines in the previous four quarters. Housing construction rose 2.8%, which is also welcome news after five quarters of contraction. Federal government spending excluding defense took another big hit, dropping 12.7%.
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Expect moderate GDP growth to continue into 2027. (Growth of 2% should become roughly the norm from now on, since it represents the sum of productivity gains and labor force growth, which determine long-run economic growth potential.) The main threats to the economy at the moment are high gasoline costs, which could eat further into consumers’ pocketbooks, and high diesel prices for heavy trucks, which could raise prices for other goods by adding to shipping costs. The Federal Reserve raised interest rates in September and will likely continue to do so, in order to control inflation by slowing the economy a bit. Finally, much of the heavy business spending on computer equipment and semiconductors is going to imports, which doesn’t help U.S. economic growth.
The Trump administration is continuing to impose new tariffs, but these will have little net effect on GDP growth going forward, since they mostly replace previous tariffs that expired or were invalidated by the Supreme Court. Importers are starting to receive refunds of tariffs paid under the invalidated tariff regime.
Government spending will continue to contribute little to GDP growth. Federal defense spending to replace ammunition stocks has yet to ramp up, and nondefense spending will likely remain flat or down.
Source: Department of Commerce: GDP Data
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