What’s Driving U.S. Growth in 2026

Michael Gapen, Morgan Stanley's chief U.S. economist, presents the 2026 U.S. economic outlook, forecasting a shift from slow growth and sticky inflation in 2025 to moderate growth and disinflation in 2026 and 2027. He projects modest growth of 1.8% in 2026 and 2% in 2027, with inflation cooling but remaining above the Fed's 2% target. The labor market is expected to remain soft due to immigration controls and tariffs, leading the Fed to implement rate cuts to mitigate weakness, even if it means inflation stays elevated longer. AI is identified as a significant growth driver, contributing to productivity gains despite import dilution. Gapen also outlines risks, including potential demand upside leading to higher inflation, productivity upside from AI, and a mild recession scenario.