ANN ARBOR – The University of Michigan’s Annual Economic Outlook Conference predicts the jagged pattern of quarterly growth rates results in calendar year 2026 growth averaging 2.4 percent and just 2 percent growth in 2027.
The report also said annualized pace of real GDP growth in 2025Q3 to come in around 3.1 percent thanks to robust consumption and business fixed investment expenditures.
The pace of growth roughly halves in 2025Q4 as a rising share of tariff costs accrues to consumers, the labor market softens further, and the federal government shutdown adds drag.
Moderate tax cuts, less restrictive monetary policy, and the end of the shutdown will set the economy on a steadier growth path by early next year. The jagged pattern of quarterly growth rates results in calendar year 2026 growth averaging 2.4 percent. In calendar 2027, growth settles down to 2.0 percent.
The unemployment rate edges up from 4.3 percent in 2025Q3 to 4.5 percent in 2025Q4, then flatlines through the end of 2027. Monthly payroll job gains bottom in 2025Q4 before slowly recovering to just over 100,000 per month by 2027Q2, driven by solid economic growth.
The annualized quarterly pace of core CPI inflation peaks in 2025Q4–2026Q1 at 3.4 percent as tariffs filter through the economy, before gradually easing over the rest of the forecast horizon. Year-over-year PCE inflation stays in the 2.5–2.7 percent range through 2027Q2, before decelerating to 2.3 percent by 2027Q4.
With plenty of supply for sale, new single-family home starts flatline for a couple of quarters before picking up gradually to 996,000 units by 2027Q4. Multi-family starts hold steady as solid economic growth sustains rental demand, averaging 400,000 units in 2026–27.
Light Vehicle Sales
The 16.3-million-unit light vehicle sales pace through August likely benefitted from pull-forward sales due to tariff front-running and the EV credit expiration. The sales pace dipped to 15.3 million in October.
With higher prices and lower manufacturer incentives, sales are expected to average 15.6 million units in 2025Q4. Light vehicle sales hover around 15.7–15.8 million units in 2026–27 as automakers pass through a meaningful share of tariff-related costs to consumers.
The U-M report said with the data blackout thanks to the longest federal government shutdown, assessing an already complicated economy feels more like reading tea leaves this time. We have had to lean heavily on alternative data sources and nowcasts of the official data.
Data released in late September, however, point to stronger consumption expenditure growth in 2025Q2. The annualized pace of real final sales to domestic private purchasers was revised up by 1.7 percentage points. With solid consumption expenditure readings in July and August, headline growth likely ends the third quarter on a firm note. As we write, the Atlanta Fed’s GDPNow pegs real GDP growth pace at 4.0 percent for the third quarter of 2025.
Although the federal government shutdown has ended, delayed federal economic statistics will take time to be released. It remains unclear how missed fieldwork for key indicators, such as the unemployment rate, will be handled.
Labor Market Cools Into Fall
September–October readings from private data do not suggest a break from the controlled softening in the labor market. New unemployment insurance claims aggregated across the states have held steady through October. The WARN Act notices, which track the number of affected employees 60 days before layoffs, have retreated to a modest level in recent months after a spike in May–July.
As separations under the deferred resignation program come due, federal government employment is poised to shrink by more than 150,000 jobs in 2025Q4. A negative monthly print for nonfarm payroll job gains is highly likely if and when the October statistics are released.
The Chicago Fed’s nowcast of the unemployment rate predicts a moderate uptick from 4.3 percent in August, though its October estimate of 4.4 percent was constrained to non-government data. The federal government shutdown likely added at least 0.1 percentage point on top of the September reading.
Inflation Largely in Limbo
Progress toward inflation normalization appears to be stalling, as goods inflation reaccelerated while services inflation continued to run hot. Without quality alternative data on real-time inflation, we will have to wait for official releases to assess whether inflation has peaked or continues to accelerate in the aftermath of the tariffs.
The Longest Shutdown for a Short-Lived Blip
The longest federal government shutdown finally ended on November 12, with a continued resolution through January 30 and three appropriation bills for Agriculture, the Military, and the Legislative Branch. Given the length of the shutdown, the reduction in services provided by furloughed workers will be visible in the 2025Q4 NIPA data. Therefore, we expect a meaningful drag on real GDP growth from the federal government in 2025Q4, followed by an offsetting rebound in 2026Q1.
Having ballooned in fiscal 2025 thanks to rising tariff revenue, the pace of nominal revenue growth likely moderates as tax cuts take effect and inflation decelerates. Even so, revenue growth still modestly outpaces expenditure growth over fiscal 2026–27, as transfer payments slow with cuts to safety net programs and non-defense spending remains anemic. As a result, the federal deficit dips to just below 6.0 percent of GDP.
Less Noise, Same Tariff Bite (for Now)
The band of uncertainty associated with trade policy has narrowed. Although we await the Supreme Court’s ruling on a subset of tariffs, the one-year truce with 3 China brought back some predictability. Actual tariff costs borne by businesses appear to track below headline policy rates as firms rely on bonded warehouses and other tactics to minimize duties due. We expect effective rates paid by firms to settle near 10 percent. Tariffs should keep modest, temporary pressure on core goods inflation.
A Foggy Fall for the Fed
The FOMC cut the federal funds rate range at each of its two most recent meetings by a combined 50 bps, with the October decision coming with two opposing dissents. The Fed will likely enter its December meeting without sufficient data to resolve any October disagreements. Given recent employment data and a somewhat better than expected October CPI report, we believe that the FOMC will prioritize risks to the labor market and cut by 25 bps again in December. The Fed plans to halt the current balance sheet runoff in December after stress in money markets emerged in October.
A Hint of Recovery in the Housing Market, Finally
Somewhat lower mortgage rates have given the housing market some respite: home prices were largely flat amid soft demand, but affordability started to improve. While existing home sales remained soft, new home sales offered a glimpse of recovery. The sub-index for sales expectations in the NAHB/Wells Fargo Housing Market Index rose above the contractionary zone for the first time in eight months.
