A panel of economists advising the American Bankers Association expects the US economy to continue expanding through 2027, although persistent inflation could prompt the Federal Reserve to raise interest rates again. The panel, made up of economists from 15 large and regional banks, said consumer spending and investment in data centers and artificial-intelligence equipment were still supporting growth, while recession risks had fallen significantly from a year earlier.
Q3 GDP growth forecast at 2.7%
The panel's latest forecast, released on September 23, puts real US GDP growth at 2.7% in the third quarter. Growth is expected to slow in the fourth quarter, but quarterly expansion in 2027 is projected to remain between 2.2% and 2.3%.
Beth Ann Bovino, chair of the panel and chief economist at U.S. Bank, described the forecast as "slightly more optimistic" than last year's outlook. She said the increase in nonresidential fixed investment was running at roughly twice the pace recorded a year earlier, with artificial-intelligence investment among the main drivers. The US labor market is also expected to remain relatively stable over the next 15 months, with unemployment holding just above 4%.
Bovino said the US economy was still maintaining its footing overall, and that most panel members remained relatively positive about the economic outlook.
PCE inflation could reach 3.8% this year
Improved growth expectations have not removed pressure on prices. The panel expects the Federal Reserve's preferred inflation gauge, the personal consumption expenditures (PCE) price index, to rise to 3.8% in both the third and fourth quarters of this year. It then forecasts a decline through 2027, with inflation reaching about 2.2% by the end of next year. The latest data for July showed annual PCE inflation at 3.7%.
US inflation has remained above the Federal Reserve's 2% target for more than five years since surging during the pandemic. The consumer price index rose 3.4% year over year in August, unchanged from July. The highest reading so far this year was 4.2% in May.
The panel said inflation remaining above target would increase the likelihood of another rate hike. Its current forecast calls for the Federal Reserve to raise rates once more in December, then hold them steady through 2027.
Oil prices and geopolitics complicate the rate outlook
The Federal Reserve's actual decisions will continue to depend on incoming economic data and market conditions. Federal Reserve Governor Michael Barr said on September 23 that further policy adjustments could still be needed to bring inflation down, but he did not say whether he supported a December rate increase or identify a specific timetable.
Thomas Simons, chief US economist at Jefferies, said in a recent research note that the December decision would depend in part on geopolitical developments, including the course of the Iran war. Since the conflict began on February 28, traffic through the Strait of Hormuz has slowed markedly, helping push oil prices higher.
Simons said that if progress were made and shipping through the strait resumed, oil prices could fall quickly, reducing the need for another rate increase. Lower oil prices could also lift real household incomes and ease inflationary pressure on other goods and services. The direction of the conflict remains difficult to assess.
Recession probability falls below last year's estimate
The panel has also become less concerned about a US recession. A year ago, it put the probability of a recession this year at roughly one in three. Its latest forecast lowers that estimate to 15%, while assigning a 25% probability to a recession next year.
Consumer demand remains resilient. Scott Anderson, chief US economist at BMO Financial Group, said in a research note that consumers were still "spending at a fairly strong pace" despite continued price increases. US retail sales rose 6% year over year in August, although some of that increase reflected higher prices rather than a larger volume of goods purchased.
For banks, higher interest rates could weigh on loan demand. Bovino said the September rate increase and the possibility of another hike before year-end would both have some impact on credit demand. She added that the cumulative effect of two rate increases in the second half of 2026 would not yet be enough to undermine the broader operation of the US economy.