Key facts
- US real GDP grew 2.1% year-on-year in Q2.
- Domestic demand in the private sector grew 2.7% in Q2.
- AI investments and strong equity gains are driving US economic growth.
- Real GDP growth is projected to moderate to 1.9% by 2028.
- A downside scenario forecasts a 35% equity market correction and GDP contraction in 2028.
- Stagflation is a risk due to weakening jobs and persistent inflation.
The US economy is showing resilience, with real gross domestic product (GDP) growing 2.1% year-on-year in the second quarter, fueled by business investments in artificial intelligence and positive wealth effects from strong equity price gains. Domestic demand, measured as real final sales to private domestic purchasers, was even stronger at 2.7%.
Deloitte has raised its economic outlook, anticipating stronger growth compared to previous forecasts. However, the firm expects growth to moderate over the next two years, with business investment and consumer spending likely to slow due to elevated inflation and rising interest rates. Fiscal policy is also expected to become a modest headwind as certain tax credits phase out, and international trade is unlikely to provide significant impetus due to global growth and trade tensions.
Looking beyond the next two years, real GDP growth is projected to accelerate to 2.3% by 2031, supported by anticipated productivity improvements from AI investments. Inflation is expected to decrease, leading to lower interest rates.
A downside scenario outlined by Deloitte assumes significantly lower returns on AI investments, with consumers and businesses opting for open-weight models and foreign models gaining market share. This scenario includes an equity market correction of 35%, a decline in business investment, rising default rates on AI-related debt, and a pullback in consumer spending. In this scenario, the unemployment rate could rise to 7.2%, with real GDP growing by only 0.2% in 2027 before contracting by 1.2% in 2028. The US Federal Reserve would likely cut interest rates, but the recovery is expected to be slower.
Meanwhile, the US economy faces a potential stagflation challenge, characterized by a weakening job market and inflation remaining above the Federal Reserve's 2% target, potentially exacerbated by tariffs. Market expectations are for two 25-basis-point rate cuts by the Fed. Fed Chair Jerome Powell's term expires in May, and President Trump has been critical of the Fed's independence.