Scenarios
Baseline
We assume the average US tariff rate rises from about 9% at the time of writing to 12% as the country implements more tariffs and importers increasingly rebuild their inventories with goods. The actual tariff rate will likely fluctuate amid new court rulings, tariff policy changes, and a new administration in 2029. We expect net international migration of 321,000 per year to persist through the end of 2030. This is in line with the US Census Bureau’s estimate of net migration for 2026,2 and is significantly lower than the 2.4 million recorded in 2024.3 Finally, we assume that investment in artificial intelligence remains relatively strong but does not lead to a large increase in economywide productivity growth until after 2030.
AI is already having a sizable effect on the economy. In the baseline, we have increased the level of business investment compared with our December 2025 forecast. This reflects the sizable capital expenditure plans that AI “hyperscalers” have announced for this year.4 We now expect real business investment to grow by 4% in 2026—an acceleration from the second half of 2025.
Although hyperscalers are raising their investment plans, business surveys5 show that many other companies are far more hesitant to spend. Elevated interest rates, rapidly rising input costs, and policy uncertainty are likely contributing to this hesitancy. Furthermore, even investment in data centers, while still strong, is slowing from a growth standpoint.
Similarly, real consumer spending is expected to be stronger in the near term, thanks to AI-driven gains in equity prices. This positive wealth effect helps explain why aggregate consumer spending has grown at a faster rate than aggregate wages. However, we expect spending to better align with wage growth as consumers face significant headwinds.
Tariffs have increasingly shown up in consumer prices—a trend we expect to continue in the coming quarters—further eroding purchasing power as nominal wage growth moderates. Elevated energy prices are also expected to contribute to higher inflation, though we assume that energy prices begin to decline again by the fourth quarter of this year across all three scenarios. The fall in immigration is also expected to weigh on consumer spending growth, and hence, real consumer spending is projected to slow to 2.1% in 2026 from 2.7% in 2025.
Despite the moderation in consumer spending, real gross domestic product is expected to grow a healthy 2.2% in 2026. This is largely due to stronger data in 2025. Mathematically, the strong growth at the end of 2025 puts upward pressure on the growth rate in 2026. By 2030, real GDP growth is expected to shift to its potential rate of about 1.7%.
Downside: AI goes from boom to bust
Our downside scenario maintains the same tariff and immigration assumptions as the baseline. However, it assumes that AI investment gets overdone, leading to a sharp pullback in business spending in 2027 as companies reassess potential demand for related products. Real business investment is expected to decline by 3.2% in 2027 and another 0.7% in 2028—representing a sharper decline than in our December forecast. Companies are increasingly tapping financial markets to fund AI-related investments, which could create negative spillover effects should they be unable to repay their debt.
Although the contraction in business investment is significant, it is smaller than those seen in previous recessions. The peak-to-trough decline in our downside scenario is approximately 60% of the decline following the dot-com bust and about 40% of that seen during the Great Recession. Businesses unrelated to AI have already tightened their belts, which should help limit further declines. Additionally, the depreciation cycle for many of the components of AI-related investments is likely much shorter than it was for fiber-optic cables during the telecom boom in the late 1990s. Rising obsolescence of existing AI infrastructure will likely force companies to make new investments just to maintain existing capabilities, which could drive more spending to prevent moving further from the technological frontier.
We expect stock prices to fall roughly 10% from peak to trough. This brings price-to-earnings ratios to less optimistic levels than those seen recently. This sudden drop in wealth has an outsized effect on consumer spending, which has been heavily dependent on top earners who are likely more influenced by changes in their financial portfolios. As a result, we expect real consumer spending to grow by just 0.2% in 2027 and to fall by 1% in 2028.
The weakening of domestic demand raises the unemployment rate to 6.5% in 2028 and provides a stronger disinflationary impulse, allowing growth in core personal consumption expenditure (PCE) prices to dip below the Fed’s 2% target by the end of 2027, before returning to 2% by 2030. The midpoint of the federal funds rate drops below 1% by the end of 2027. Real GDP is expected to decline by 0.4% in 2027 and 1% in 2028. A stronger recovery is expected in 2029 and 2030.
Upside: The AI investment boom endures
We assume an average tariff rate of about 5% by year-end as more exemptions are made. We also assume stronger net migration, with the adult population standing around 860,000 higher than in the baseline by 2030. Business investment, driven by AI, is expected to grow stronger than the baseline sustainably. AI-related productivity gains are expected to show up in the data in 2027.
Lower tariffs help limit the inflationary impulse from stronger business investment and higher net migration. However, we still anticipate a slightly stronger near-term inflationary impulse. This is expected to delay the Fed from lowering interest rates in 2026, prompting it instead to make its next cut in 2027. Aggregate consumer spending remains relatively strong, supported by faster population growth and ongoing gains in equity markets. As the labor market tightens and productivity growth picks up, real wage growth also strengthens, giving spending an additional boost.
Although aggregate business investment is expected to strengthen, its growth is expected to be uneven. Elevated long-term interest rates will restrain investment in some sectors, especially those that have little to do with AI. However, lower tariff rates also reduce input costs, particularly for capital-intensive businesses, which should help some firms to better overcome elevated financing costs.
