Economic Scenarios: Understanding Future Trends
Baseline: Projecting Current Trends
The average tariff rate in the U.S. is projected to increase from approximately 9% to 12% as the nation implements additional tariffs and importers focus on replenishing their inventory. This fluctuation in tariff rates will likely change due to upcoming court rulings, shifts in tariff policy, and the changing political landscape in the lead-up to the 2029 election. Furthermore, net international migration is expected to stabilize at around 321,000 individuals annually through 2030, aligning with projections from the U.S. Census Bureau. This figure sharply contrasts with 2024’s impressive 2.4 million net migration.
Investment in artificial intelligence (AI) is anticipated to remain robust, though significant boosts in economy-wide productivity may not materialize until post-2030. Presently, AI is already making a considerable impact on economic landscapes. This baseline scenario reflects an increase in business investments compared to forecasts made in December 2025, recognizing the aggressive capital expenditure plans set by AI “hyperscalers” for this year. Real business investments are expected to grow by 4% in 2026, accelerating from late 2025 figures.
While hyperscaler investments are on the rise, many other businesses are exercising caution. High interest rates, surging input costs, and uncertainties in policy are likely causing these companies to hesitate on spending. Even as demand for data centers remains strong, growth in that sector is witnessing a slowdown.
On the consumer front, increased spending is expected in the short term, fueled by AI-induced gains in equity prices. This wealth effect explains the discrepancy between the faster growth rates of consumer spending compared to wage increases. However, as consumers encounter numerous challenges—including increased tariffs affecting consumer prices and a projected moderation in nominal wage growth—spending growth is expected to decelerate to 2.1% in 2026, down from 2.7% in 2025.
Despite this anticipated slowdown in consumer spending, real gross domestic product (GDP) is projected to exhibit impressive growth of 2.2% in 2026. This growth is primarily attributed to stronger data from 2025, lifting the expected growth rate for 2026. By 2030, GDP growth is anticipated to stabilize at a potential rate of about 1.7%.
Downside: A Potential AI Investment Decline
In a downside scenario, we maintain the same assumptions regarding tariffs and immigration. However, this model posits an over-invitation of AI investment, leading to a significant pullback in business spending in 2027 as companies reassess the demand for AI-related products. Real business investment is projected to decrease by 3.2% in 2027, followed by a 0.7% decline in 2028—indicating a sharper contraction than previously forecasted.
While the anticipated contraction in business investment is noteworthy, it remains less severe than previous economic downturns, representing about 60% of the decline witnessed in the dot-com bust and roughly 40% of the downturn seen during the Great Recession. Change will be driven by businesses outside of the AI sphere tightening their spending. Additionally, the faster depreciation of AI-related investments may necessitate renewed spending just to sustain technological capabilities.
We foresee stock prices dipping around 10% during this period, which will negatively impact consumer spending, notably among top earners who are more sensitive to shifts in their financial portfolios. As a result, real consumer spending is projected to rise by only 0.2% in 2027 and decline by 1% in 2028.
This reduction in domestic demand is expected to elevate the unemployment rate to 6.5% in 2028 while contributing to a disinflationary trend. Core personal consumption expenditure (PCE) prices are forecasted to dip below the Federal Reserve’s 2% target by the end of 2027 before converging back to 2% by 2030. The federal funds rate midpoint may fall under 1% by late 2027, with real GDP projected to decrease by 0.4% in 2027 and 1% in 2028, although a stronger recovery is predicted for 2029 and 2030.
Upside: Continued Growth in AI Investment
In contrast, our upside scenario anticipates tariff rates dropping to around 5% by year-end due to more exemptions, alongside stronger net migration bringing the adult population approximately 860,000 higher than predicted in the baseline by 2030. Business investment driven by AI is expected to see sustainable growth, with productivity gains becoming apparent in 2027.
Reduced tariffs should help minimize inflationary pressures stemming from increased business investments and rising net migration. However, a slight near-term inflationary impulse may delay the Federal Reserve’s action on interest rates until 2027. Aggregate consumer spending is expected to remain robust, supported by faster population growth and positive equity market trends. As the labor market tightens and productivity rises, real wage growth should receive a further boost.
Although overall business investment is set to improve, growth may be uneven due to elevated long-term interest rates; some sectors—particularly those less related to AI—might experience restrained investment. Conversely, the reduction in tariff rates may lower input costs, enabling capital-intensive businesses to better navigate high financing expenses.
