The US has exhibited both strength and frailty over the past month. Backed by earnings beats and despite a new cycle high for Brent oil, its equity markets have rebounded strongly to record levels. At the same time though, growth in consumer demand has fallen below trend and housing investment is contracting. In many respects, the outlook is highly uncertain.

Beginning with the positives. The confidence financial markets have shown amid open-ended uncertainty for energy supply, the pass-through to consumer inflation and elevated yields is jarring. Participants’ responses to recent earnings results and news of the build out of AI infrastructure helps to make sense of these outcomes, however.

Simply, there is a dominant belief that the US’ real economy can be protected from the worst of the supply disruptions by its domestic energy production and refining capacity. And, both now and in the long run, is at the forefront of productivity and profitability enhancement through technology. The surge in energy exports as well as intangibles and equipment investment supports both notions. The strength of these investment sub-types arguably also warrants expectations of sustainable income gains and an ability to, in time, contain inflationary pressures, providing scope for persistent, robust returns.

We do not doubt the strength of tech-related investment or the capacity it is creating. But we see a need to caution on the sustainability of its contribution to GDP growth because momentum tends to moderate as an industry matures, and owing to the concern being shown by investors over the financing terms and lifecycle of assets within the sector. We also believe it is important to recognise that, outside of AI infrastructure and related equipment investment, business investment is soft. Indeed, at circa 6%yr, annual growth in total business investment is broadly in line with the historic depreciation rate for the US capital stock, implying no net increase in functional capacity. Also, in the public sector, while activity rebounded in Q1 2026 following Q4’s shutdown, the level of spending is unchanged over the year.

At the same time, the pulse of consumer demand has continued to soften, from an above-trend annualised pace of 3.2% through 2023 and 2024 to a sub-par 2.1% annualised in 2025, and now 1.6% in Q1 2026. This is despite the unemployment rate remaining consistent with full employment, the drag on real discretionary income fading and as real wealth accrues. Also affected by elevated term interest rates, housing construction continues to contract to now be down more than 18% since early 2021, even with solid population growth.

It is extremely difficult, if not impossible, for an economy to grow at or above trend when sectors representing 72% of total activity are experiencing a sub-par performance, or contracting outright. The import component of the above activity is an additional headwind for GDP growth which is unlikely to subside, even if President Trump finds a way to permanently impose tariffs and entice new investment.

Our take on the above positives and negatives is that the US economy finds itself with the capacity to grow at or near trend through 2026-2028, but momentum is likely to be concentrated amongst a sub-set of tech-centric businesses and higher-income households, with volatile outcomes around a broadly flat trend anticipated elsewhere. Meanwhile, limits on capacity outside of technology is, all else equal, likely to hold inflation consistently above target. As we have emphasised repeatedly, the adoption of AI and related technology offers the opportunity for greater productivity from labour. But limits on migration are likely to create offsetting wage pressures and frictions in production.

For US monetary policy, known risks are therefore set to remain skewed towards misses on inflation versus a material increase in labour market slack. The market is likely to price in at least a chance of a rate hike over the forecast period, and term interest rates a lasting hawkish tilt. For the long end of the yield curve, the effect of higher inflation expectations will be magnified by the implications for Government servicing costs – a higher share of expenditure going to interest payments, increasing the stock of debt and reducing the Government’s capacity to invest for growth. In our view, this uptrend for interest rates is unlikely to boost the US dollar, being paired with modest US economic growth and opportunities in other parts of the world, for businesses and investors alike.

This analysis initially appeared in Westpac Economics’ May Market Outlook.

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