US economic outlook: UBS sees a bumpy US outlook as AI sustains growth while the broader economy weakens.

Overview

UBS presents a US macro outlook in which AI is the principal source of resilience, supporting investment, equity wealth and spending, while much of the non-AI economy remains soft. The institution expects a bumpy path as fiscal support fades, policy tightens and tariffs and energy costs keep inflation above target.

Core views

UBS argues that the US expansion has become unusually dependent on AI and technology capital expenditure, and on the household wealth created by that theme. AI and tech are driving investment strength and likely supporting upper-income consumption; equity wealth reached a record 38% share of household net worth in Q2 and has accounted for essentially all real-wealth gains of the past several years. This has allowed real spending growth to continue outpacing income growth, partly through lower saving. However, structures and residential investment fell over the past four quarters, government spending has flatlined, and many households appear under pressure. UBS therefore characterizes resilience as narrow rather than broad-based. The investment data underpin this view. Over the past four quarters, AI/tech-related real equipment investment increased 20%, whereas other equipment investment declined 2%. Within intellectual property investment, software rose 11% and R&D rose 8%, while the rest declined 0.6%. UBS notes that real non-residential structures and residential investment have contracted for two years. OBBBA tax provisions and inventory rebuilding may temporarily broaden activity, but the institution expects fiscal support to wane and AI/tech capex to remain the dominant investment driver. Imports have remained supported despite tariffs because the AI buildout requires imported technology inputs, while import sourcing has shifted away from China toward other Asian economies. For households, tariffs and higher energy prices are eroding the boost from OBBBA while labor-market slowing reduces income growth. UBS estimates that OBBBA-related tax refunds added about $60 billion to households in the first half of 2026, but regards this as peak fiscal support for spending and questions whether consumption can keep outpacing income to the same degree. Households across income groups report greater sensitivity to future inflation than in 2022, and those below the top income quintile have relatively limited liquid assets. This makes the consumption outlook vulnerable if equity wealth or AI investment loses momentum. UBS expects fiscal policy to support 2026 growth through front-loaded OBBBA tax cuts, then become a drag as budget cuts take effect in 2027 through 2029. It estimates that fiscal policy added 1.1 percentage points to growth in 2023 and 0.5 percentage points in 2024, turned contractionary in 2025, and was flipped back into support in 2026 by OBBBA. Even with roughly $250 billion of tariff revenue over the next two years, UBS expects the federal deficit to remain a little above 6% of GDP. It also highlights continued uncertainty around tariff implementation and litigation: 19 trading partners face 10% tariffs and 41 face 12.5% tariffs under the July 24 measures, while UBS estimates the weighted-average tariff rate at about 11.4%. The labor market is stable but weaker beneath the surface, in UBS's assessment. Excluding health care and social assistance, private payrolls added only 22,000 jobs per month over the 12 months through August. Household-survey employment growth has been weak, labor-force participation has fallen, and nominal wage growth has slowed notably. UBS sees subdued labor demand, limited immigration and residual seasonality persisting in 2026, although some sectors such as manufacturing may have found a bottom and the federal government is unlikely to shed 300,000 jobs in 2026. Inflation has been pushed away from the Federal Reserve's 2% target by tariffs and higher energy prices, despite earlier disinflation. UBS notes that core PCE had fallen from a 5.61% peak to 2.61% by April 2025, while headline inflation reached 2.28%, before widespread tariffs and higher energy prices created new supply shocks. It estimates core PCE inflation peaked near 3.4% year over year in May and forecasts 3.1% Q4/Q4 in 2026, slowing by more than 0.5 percentage point to around 2.4% in 2027 but remaining above target over five years. Tariff pass-through should slow, and the energy shock may wane, but the timing and magnitude of further supply disruptions remain uncertain. UBS sees the FOMC confronting cost-push inflation that interest rates cannot readily cure without further restraining already soft domestic sectors. It expects 25bp rate increases at the September and December 2026 meetings, taking the federal-funds-rate midpoint to 4.125%, and forecasts that level through 2027 before easing to 3.625% by mid-2028. The institution believes tightening will principally slow the ex-AI economy rather than materially derail AI investment. It also expects markets to adjust to a more hawkish and less transparent Chair Warsh reaction function, raising the risk of mispricing and volatility. Reserve-management purchases, which were reduced from about $40 billion per month to $25 billion and then $10 billion before stopping, are assumed to resume at about $30 billion per month in 2027 to maintain ample reserves. Beyond the near-term softness, UBS identifies two drivers of stronger structural growth: a diminishing drag from population aging and an AI-led productivity regime shift. It forecasts structural US GDP growth closer to 2.5% over the coming three to five years, versus sub-2% pre-Covid and FOMC estimates. The productivity benefit is expected to bring greater labor-market disruption. AI was cited as the primary reason for 6% of announced job cuts in 2025, although UBS considers the current direct effect modest and notes that recent college-graduate unemployment is up 1.7 percentage points year over year for reasons not limited to AI. The central risk is that the expansion rests too heavily on AI and related equity wealth. In UBS's modeled AI-bust scenario, unemployment rises close to 6%, inflation falls below 2%, and the funds rate returns to the zero lower bound. Upside outcomes include a larger or more persistent OBBBA impulse and stronger technology investment. UBS's baseline forecasts are real GDP growth of 2.2% in 2026, 1.9% in 2027 and 2.6% in 2028; unemployment of 4.2%, 4.5% and 4.4%; PCE inflation of 3.6%, 2.0% and 1.9%; and core PCE inflation of 3.1%, 2.4% and 2.1%, respectively.

Analysis framework

UBS combines national-account and labor-market data with sectoral investment and household-wealth evidence to separate AI-driven activity from the rest of the economy. It then incorporates fiscal measures, tariff and energy shocks, inflation projections and a projected Fed path, alongside upside and downside scenarios for AI and fiscal support.

Methodology notes

• Industry AnalysisVolume-price decomposition

  Separating AI/technology investment from non-AI investment components.

  UBS compares growth in AI-related equipment, software and R&D with declines in other equipment and investment categories to show that capital spending strength is narrowly concentrated.

• MacroeconomicsCredit and Debt Cycle

  Fiscal impulse and deficit analysis.

  The report traces how OBBBA tax measures, spending cuts, tariff revenue and deficits affect GDP growth across 2026-29.

• Event-Driven and Behavioral FinanceEvent-driven analysis

  AI-bust scenario analysis.

  UBS models the macroeconomic consequences of a reversal in the AI theme, including unemployment, inflation and the policy-rate response.

Key data

• Real GDP growth forecast2.2% in 2026; 1.9% in 2027; 2.6% in 2028Q4/Q4 forecast
• Core PCE inflation forecast3.1% in 2026; 2.4% in 2027; 2.1% in 2028Q4/Q4 forecast
• Federal funds rate forecast4.1% in 2026 and 2027; 3.6% in 2028Q4 midpoint of target range
• AI/tech-related equipment investment20%Increase over the past four quarters; other equipment fell 2%
• Equity wealth share of household net worth38%All-time high in Q2
• OBBBA tax-refund boost~$60 billionAdded to households in H1 2026
• Weighted-average tariff rate~11.4%UBS estimate after recent tariff actions

Impact & implications

UBS expects policy tightening and fading fiscal support to weigh more heavily on the ex-AI economy, while AI investment and related wealth remain the main supports for growth. The report also expects more volatile market pricing as inflation shocks, policy uncertainty and less transparent Fed communication interact.

Risks

• A faltering AI investment cycle or decline in AI-related equity wealth could put the expansion at risk.
• Higher or longer-lasting energy prices could raise business costs, restrain spending and prolong inflation pressure.
• Tariff implementation, litigation and geopolitical volatility could sustain trade and policy uncertainty.
• A weak labor market combined with higher energy costs could worsen the downside outlook.

What to watch

• Whether AI and technology capital expenditure remains strong enough to support the broader expansion.
• Whether consumer spending continues to outpace income after OBBBA-related refunds and fiscal support peak.
• The path of energy prices, tariff pass-through and core PCE inflation.
• FOMC decisions, Chair Warsh's communication approach and the December 2026 rate decision.
• The 2026 midterm elections, fiscal legislation and the timing of the fiscal-policy drag in 2027.