- Key insight: Economists at large and regional banks shared their updated forecast for GDP growth and inflation, saying that their overall perspective is brighter than it was a year ago.
- What's at stake: How long the U.S. economy can keep growing remains to be seen, given persistently high inflation. In response to higher prices, the Federal Reserve recently implemented its first interest rate hike in more than three years.
- Supporting data: The panel of economists predicted that inflation will climb to 3.8% during the third and fourth quarters before falling to the low 2% range over the course of 2027.
Economists at some of the largest U.S. banks expect the economy to keep chugging along into next year, even as they predict that inflation will remain elevated due to the war-driven escalation of oil prices.
The American Bankers Association's Economic Advisory Committee, a group of economists from 15 large and regional banks, predicted Wednesday that real gross domestic product will reach 2.7% during the third quarter, as consumers continue to spend, and businesses keep investing in data centers and related technology equipment. The group expects real GDP to cool in the fourth quarter, but remain steady between 2.2% and 2.3% throughout 2027.
The latest report is "a little bit more optimistic than last year," Beth Ann Bovino, chair of the committee and chief economist at U.S. Bank, told reporters.
The positive sentiment was partly driven by "a huge jump in non-residential fixed investments" — the size was about double from the prior year — including investments in AI, Bovino said. It was also driven by a labor market that's expected to remain solid over the next 15 months. The economists predict that the unemployment rate will remain steady in the low 4% range.
"Overall, the economy is holding up," Bovino said. "Most members were pretty upbeat."
The economists' updated forecast was delivered less than two weeks after the U.S. Bureau of Labor Statistics offered its latest inflation data and seven days after the Federal Open Market Committee
After rising sharply during the pandemic, inflation has exceeded the Federal Reserve's target of 2.0% for more than five years.
On Wednesday, the bank economists predicted that personal consumption expenditures inflation, the Fed's preferred measure, would climb to 3.8% during the third and fourth quarters of this year, then decline in 2027, ending next year around 2.2%. The most recent reading in July showed 3.7% growth.
Persistent inflation increases the risk of more rate hikes, the committee noted. It is forecasting another rate hike in December and then expects the Fed to hold steady on rates next year.
It remains to be seen what FOMC members will decide.
In a recent research note, Thomas Simons, chief U.S. economist at Jefferies, said the likelihood of a rate increase in December will likely depend partly on geopolitical developments, including the war in Iran. The conflict, which began Feb. 28, has led to a spike in oil prices, since the passage of ships through the Strait of Hormuz has slowed considerably.
"If there is meaningful progress towards a deal that renormalizes traffic through the Strait of Hormuz, then we may see a rapid decline in oil prices that makes the hikes look unnecessary," Simons wrote. "Conversely, a decline in oil prices might generate a surge in real income that makes the rate hikes look like a prescient policy move, mitigating inflation pressures in other goods and services. At this point, it's too early to tell."
According to the bank economists, the risk of a recession has decreased from a year ago, when the group said there was a one-in-three chance of a recession this year. The group said Wednesday that risk is now down to 15% for this year, and it estimated a one-in-four chance of a recession next year.
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Consumers overall continue "to spend at a robust pace," even as prices climb higher, Scott Anderson, BMO Financial Group's chief U.S. economist, said in a recent research note.
Retail sales in August were up 6% year over year, though some of that increase was driven by elevated prices, Anderson wrote.
From a banking perspective, last week's hike and another potential increase this year may reduce loan demand, Bovino said. Still, the impact of two hikes in late 2026 won't be enough to "topple the apple cart" of the U.S. economy, she added.
