US Macroeconomic Outlook for Q1 2026

Emily Carter

Hi everyone, welcome back to Global Equity Research—the official podcast from Softgate Capital Research, where we break down complex finance and macroeconomic issues for investors and market enthusiasts alike. I’m Emily Carter, here with my co-host David Mitchell. As always, we're backed by the latest research to bring you actionable analysis. If you're curious about our work, check out research.softgatecapital.com: that’s where you’ll find affordable, institutional-grade equity and macro analysis.

David Mitchell

Thanks, Emily. So let’s frame today’s conversation with a snapshot: The U.S. macro outlook for Q1 2026 is all about moderate growth, easing inflation, a labor market that's losing a bit of steam... and, oh yeah, fiscal policy is front and center. Seriously, there are some big questions there. If you need three numbers for your mental spreadsheet—U.S. GDP is sitting around 2%, headline CPI near 3%, and unemployment is up in that mid-4% range. Not a recession, but definitely not boom times, either.

Emily Carter

We’ll break down what’s driving the story this quarter: first, a quick executive summary; then a look at sector trends and investment; deep dives into inflation, labor dynamics, the latest on policy—from the Fed to fiscal risks—and we’ll wrap with actionable takeaways. It’s gonna be practical, nuanced, and just a little bit nerdy—so let’s get going.

David Mitchell

Alright, here's the 60-second rundown. Despite some real headwinds, we’re not calling for a U.S. recession in early 2026. It’s more of a slow, steady—almost boring—expansion. Real GDP growth has cooled from the bounce-back highs after the pandemic, landing around 2%. That’s historically kind of a “return to potential.”

Emily Carter

And what’s holding things up is this interesting mix: Consumers just keep spending—even as rates are higher and stimulus is fading—plus we’re seeing sustained business investment, especially in artificial intelligence and tech upgrades. And don’t forget: fiscal policy got expansionary again in 2025 thanks to big packages like the OBBBA. That’s fueling demand now, even if it leaves a hangover for later.

David Mitchell

For investors, the takeaway is: The backdrop is growth-supportive, but there’s a persistent gap between where inflation is and where the Fed wants it. Plus—this is important—fiscal discipline is showing cracks that could eventually bite. Growth is alive, just watch the longer-term risks stacking up.

Emily Carter

So, let’s unpack what “2% growth” really means. After a stretch of sizzling post-pandemic growth, it feels almost… plain. But the context matters: 2% is pretty much what economists call “potential growth.” The economy's cooling, but it's not crashing. Households are still spending, especially on services. That’s a big deal.

David Mitchell

Right. And you’re seeing real sectoral splits. Manufacturing? That’s slowed to just above stall speed—PMI around 51.9, which is technically growth but only just. There’s a bit of inventory bloat and softer demand in goods, partly because those 2025 tariffs hiked the cost of imported material. Factories are definitely feeling it, with new orders down and jobs getting sparse. Meanwhile, service businesses are booming—PMI for services is 55, so there’s tangible momentum in things like travel, healthcare, and finance.

Emily Carter

Yeah, and the business investment angle is fascinating. Higher interest rates should, in theory, slow capex down, but—surprise!—we’re hearing and seeing surveys say companies are still plowing money into tech, automation, and especially anything labeled “AI.” Even a corporate CFO told us last week, and I’m paraphrasing here, “We’re just not seeing a credible way to not invest in AI-driven upgrades, even in a higher rate world.” So, there’s this floor under growth from tech capex, despite choppy manufacturing.

David Mitchell

Totally. And don’t sleep on services—if growth keeps skewing there, it has big implications for corporate earnings, labor, and the next phase of the cycle. If, and it's a big if, manufacturing firms can fix their inventories and global demand rebounds, we could see some rebalancing. Otherwise, it’s a services story for now.

Emily Carter

Let’s turn to inflation—if there’s one word the Fed still wakes up sweating about, that’s it. Headline CPI finally backed off to about 3%. Core inflation though, that’s still sticky—mid-3 percent, not where the Fed wants it. If you zoom in, the biggest issues are shelter and non-housing service prices just kind of refusing to cool off.

David Mitchell

Yeah, and the price story’s become a bit more nuanced now. Goods and energy prices have finally stabilized, thanks partially to global commodity prices drifting lower—oil ran about 75 to 80 bucks a barrel last year, which is way down from the spikes in ’22. But service inflation is still stubborn. We’re talking about strong wage pressures in stuff like healthcare, restaurants, and personal services.

Emily Carter

Plus, part of what’s keeping prices from falling as fast as folks want is markups—some sectors have managed to hang on to margin, though competition is starting to whittle that down. And then you’ve got tariffs. That’s a direct pass-through: tariffs since 2025 have driven up input costs, and a decent chunk of that lands straight on the consumer. If you’re trying to imagine it, think of inflation like a hot oven you’ve finally turned off—it’s not blazing anymore, but it’s still warm. Takes a while to cool down completely.

David Mitchell

Exactly. We might get some temporary blips—say, if oil spikes again because of geopolitics. But unless we get a real surge in wages or a new round of price shocks, the baseline is for gradual cooling, just not as quickly as in the last twelve months. Expectations are mostly anchored, but at the high end of normal. Until we see shelter and service costs finally ease, that oven’s going to keep humming.

David Mitchell

Alright, let's get into jobs and policy. The labor market is cooling, but it's... kind of a soft landing, honestly. After blockbuster years in 2021 and 2022—think 400,000 jobs a month—we’re down to maybe 50,000 to 120,000 a month by late 2025. Unemployment? Moved up into the mid-4% range; not great, but nowhere near crisis territory.

Emily Carter

Yeah, and it’s not “fire and brimstone” in layoffs. If anything, employers are reluctant to fire people after years of talent shortages—they’re just posting fewer new jobs and not cutting staff outright. Participation has stopped rising, especially among younger workers, but for ages 25–54, it’s robust—over 83%, highest since the early 2010s. That’s offsetting the drag from fewer immigrants coming in, which long-term might be a problem for sectors like agriculture and construction.

David Mitchell

Wages have cooled from their peak but are still slightly outpacing inflation—so workers are seeing moderate real gains. For the Fed, though, that wage growth still feels a bit hot. The Fed, having shifted to rate cuts, is now basically staying data-dependent. They paused after lowering rates to about 3.75% and are waiting to see if inflation comes back down to 2%. How the Fed communicates their reaction to wage and price data will really shape asset prices in the coming months.

Emily Carter

Right, for anyone making decisions—investors, policymakers—the key is keeping a close eye on wage-price trends and reading between the lines of every dot plot and FOMC statement for clues about future Fed moves. It's all about that signaling.

David Mitchell

Fiscal policy has really swung back to the spotlight this cycle. In 2025, we saw the “One Big Beautiful Bill Act”—I know, the name still makes me laugh—which basically juiced demand short-term; think tax cuts, more defense and infrastructure spending, and a heap of incentives for manufacturing. But the price tag? That’s a roughly 6% of GDP deficit, about $1.8 trillion, and that’s after some windfalls like blocked student debt relief and tariff revenue.

Emily Carter

Speaking of tariffs, those brought in an eye-popping $195 billion in 2025 alone—over double the previous year. It’s wild. The catch, of course, is that there’s legal limbo hanging over much of those tariffs—a Supreme Court decision could lead to $90 billion in refunds and wipe out a big chunk of projected future revenue. And, even with all this, the underlying fiscal picture isn’t pretty. Net public debt is around 120% of GDP and rising, with the IMF projecting 143% by 2030 if nothing changes.

David Mitchell

So the real policy trade-off—boosting growth with stimulus now, but eroding the buffers you need if there's a shock. Structural deficit is expanding even after adjusting for the cycle, and as rates reset higher, the interest bill adds up fast. Washington's going to have to reckon with tough choices if they want to keep the debt from running away. Stability now, but the risks start to snowball out in the medium term.

Emily Carter

Exactly. Anybody planning out a business or portfolio for more than the next six months—don’t ignore the fiscal trajectory here. Short-term gains are real, but the trade-off with long-term sustainability is becoming hard to avoid.

Emily Carter

Let’s get to the Fed itself. We’ve passed the peak of the tightening cycle. After jacking up rates well above 5%, the Fed shifted gears in late 2024 and started cutting. By the end of 2025, the funds rate was down around 3.75% and, for now, they’re pausing—waiting to see if inflation plays ball before moving again. Rate cuts are data-dependent, and the base case is for maybe one or two more this year if disinflation continues.

David Mitchell

Right, and quantitative tightening—QT—has been running in the background, shrinking the balance sheet from nearly $9 trillion to $7.5 trillion. If the Fed keeps easing, we'll probably see QT pause as they focus on making sure financial conditions don’t tighten too far. The good news: so far, markets have handled this normalization process really well, no big liquidity scares. The Fed’s improved its communication, too—think dot plots, more detailed outlooks—so it’s harder for surprise missteps to knock things off course.

Emily Carter

For investors and businesses, that basically means a cautiously supportive backdrop for equities and credit—rate cuts help, but don’t expect a wild rally with valuations where they are. Lower mortgage rates might breathe some life into housing, but only if inflation keeps coming down. It’s all still in the hands of the Fed’s messaging and—honestly—a little bit of luck with inflation and wage data.

David Mitchell

Now, we’d be remiss if we didn’t talk risks—and there are plenty on the table. On the upside, more aggressive AI investment could push productivity higher, leading to faster growth and steeper disinflation. A smooth extension of tariff policy could also stabilize the revenue side. Those two dynamics alone could push the Fed to ease faster and the economy to outperform the consensus.

Emily Carter

Yeah, but the downside risks are still real. If inflation heats back up—say, because of higher commodity prices or stubbornly high wage growth—the Fed might have to stop cutting, or even hike again. Another wild card is that tariff court case: if tariffs are reversed, not only do we lose revenue, but refunds and fresh uncertainty could spark volatility. And, of course, if global growth tanks—like a sharper slowdown from China or another energy shock in Europe—it won’t take long for that pain to show up here too.

David Mitchell

For folks managing money or risk, the actionable stuff is: Stay nimble. Portfolio tilts should favor quality earners and sectors less exposed to policy swings. Businesses? Build in some cushion for wage and input price bumps. And for policymakers, the watchlist remains: wage dynamics, inflation surprises, Fed moves, and whatever happens in that Supreme Court tariff case.

Emily Carter

In summary: the baseline is moderate growth with manageable—but meaningful—risks up and down, so both optimism and caution need a seat at the table this year.

Emily Carter

Let’s recap those three core headlines we promised. U.S. GDP—about 2%. Inflation—headline CPI hovers around 3%. Unemployment—in the mid-4s. Growth is resilient, but the outlook is anything but risk-free.

David Mitchell

If you found this helpful, do us a favor: Like, subscribe, and share the episode—your support helps us keep digging into the research for you. If you have questions or want us to unpack a specific trend in future episodes, send them our way. We read everything.

Emily Carter

You’ll find the full Q1 2026 U.S. Macroeconomic Outlook report in the description box, or at research.softgatecapital.com. Remember, nothing in this episode is investment advice—do your own due diligence, and consult your advisor before making any big moves. David, always a pleasure analyzing the twists and turns with you.

David Mitchell

Right back at you, Emily. Thanks to everyone for tuning in—take care, stay curious, and we’ll see you next time on Global Equity Research.

Emily Carter

Bye, everyone!