Strong AI-related investment and resilient consumption should cause GDP growth to rebound in the third quarter and maintain a growth rate of about 2.5% in the coming year. Despite the recent slowdown in employment growth, we expect the unemployment rate to fall below 4% next year as stronger labour demand is met with ongoing weakness in supply. The recent strength in core inflation and pressures from higher energy prices and AI input costs mean core PCE inflation will remain above 2% until 2028. Accordingly, we expect the Fed to hike the fed funds rate by a further 50bp to a peak of 4.25-4.50% early next year.
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