General Economic Outlook: Updates and Trends

By Daniel Morgan, Trust Portfolio Manager, Sr.

As a Portfolio Manager, Daniel Morgan has the knowledge and fiduciary responsibility you can count on to help build, maintain and transfer your wealth. From basic trust needs to extenuating estate planning circumstances, he has the experience to help individuals, families and small businesses. 

General Economic Update/Trends

• Middle East — The U.S. and Iranian conflict continues with each country playing “cat and mouse,” resulting a prolonged conflict. This has resulted in higher oil prices for longer than originally anticipated, placing pressure on inflation across many sectors.
• Tariffs/Immigration — The economic impacts of the current U.S. administration’s tariffs and deportations are lower than expected. The effective tariff rate is about 8%. However, the administration will gradually roll back the tariffs starting in 2027, continuing to reduce them to below 3% by the end of 2027.
• Employment — The economy has full employment in the second half of 2026, with the unemployment rate remaining steady. Despite volatile non-farm payroll growth, the unemployment rate should stay in the low-to-mid 4% neighborhood. Currently the consensus forecast for the European Union rate in the second half of 2026 is 4.3%.
• Investment — Business sentiment and consumer confidence should rise significantly, accelerating consumer spending and business investment growth. The return to strong gains in U.S. employment lifts household incomes and spending more than expected. Defense spending is expected to grow at an above-average pace in 2026 and 2027, thanks to increased funding in the “One Big Beautiful Bill Act” (OBBBA) to boost military capabilities across several strategic areas, including shipbuilding, missile defense and advanced technologies. While lawmakers originally intended for these funds to be distributed over a multi-year period through 2029, the Pentagon shifted its strategy to frontload and spend nearly all of the OBBBA defense money rapidly in the first two years to meet aggressive military expansion goals
• Interest Rates — Due to higher inflation and record deficits, rates in the middle and long end of the yield curve have stayed elevated, as massive debt issuance to fund federal deficit spending keeps bond investors in the hunt for higher yields to compensate for the  increase in perceived risk. The 10-year Treasury bond yields will be pressured by inflation/deficits, keeping yields in the 4.5%-4.9% range. The 30-year Treasury yield is likely to stay north of 5%. With all consumer and housing rates pegged off the 10-year Treasury yield, Mortgage (6%-7%) and Consumer rates will remain elevated.
• Gross Domestic Product (GDP) — Real GDP is projected to be above economists’ consensus expectations, which calls for only 2.1% growth for Fiscal Year 26 (FY26) and 2% growth in Fiscal Year 27 (FY27). Real GDP is expected to be higher in the second half of 2026 than the first half. For example, GDP in the second quarter rose only 1.5%, with solid domestic demand anchored by the biggest real consumption (+3.8%) rise since last year’s third quarter. But the second quarter GDP was clipped by the tariffs, as companies have reluctantly resumed importing goods. In the this year’s second half, the negative impact from tariffs should be offset by the  increase in capital per worker, resulting from higher investment generating additional growth in labor productivity, leading to above-average levels of output in the long term — creating strong Consumer expenditure spending growth. On an annual average basis, real GDP rises above the current consensus forecast  to 2.5% in FY26 and 3.1% in FY27.
• Federal Reserve Policy — Based on recent comments from Fed Reserve Chairman Kevin Warsh, the sum of recent statements points to a concretely higher likelihood for future interest rate hikes. After stating that “price stability is not self-executing, nor is inflation necessarily mean-reverting,” he listed measures showing the worrisome breadth of high inflation. Put another way, inflation sometimes needs Fed policy to return to 2%, and right now financial conditions are not moving inflation in the right direction. At this point the Fed Funds rate (short-term rate) controlled by the Federal Reserve is set at a 3.75% target rate. The continued conflict with Iran has left prices still under stress, resulting in the core Personal Consumption Expenditures (PCE) inflation rate — the Feds’ top inflation gauge — of 3.7%. In July, the Federal Open Market Committee (FOMC) voted 9-3 to maintain the federal funds target range at 3.5%-3.75%. The policy statement was essentially unchanged, but three regional presidents dissented in favor of a 25 (.25) basis point hike. Inflation is likely to stay elevated, which points to possible hike by year end.