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US Economy Outlook
June 30, 2026
By Amir Khamidullin
Shanghai, China
This outlook focuses on analyzing the macroeconomic developments in the world’s largest economy, including the labour market, inflation data, economic growth projections, and the fragility behind them. The Fed’s surprisingly hawkish stance, mounting inflation pressure, stronger labour market, and AI impacts were among the key headlines of recent weeks. While the consensus view on the US economy is relatively clear, a more nuanced and in-depth outlook is crucial for understanding the broader picture of the US economy. The main implications found are:
- The Federal Reserve under Kevin Warsh has turned decisively hawkish, abandoning forward guidance for a data-dependent stance; markets were caught offside, with 2Y yields jumping 16bp on the June decision, and are now pricing hikes rather than cuts into 2027.
- The labour market’s headline strength masks a more fragile composition: gains are concentrated in a few defensive and temporary sectors, hiring is skewing part-time, and forward-looking demand is cooling, even as the breadth of gains improves, the durability of that strength remains in question.
- Inflation is likely to stay higher for longer. Beneath the energy-driven headline spike sits a structurally higher floor (lagged tariff pass-through, a tighter labour supply, loose financial conditions, and acyclical inflation now exceeding cyclical) making a return to target within 2-3 years unlikely.
1: (Surprisingly) Very Hawkish Fed
Fed decided to put rates on hold during its most recent meeting on June 17, with the target range for the federal funds rate (FFR) sitting at 3.5% – 3.75% range. Federal Reserve projects median PCE inflation to slow down from 3.6% this year to 2.3% in 2027, while median core PCE drops from 3.3% to 2.5%. The growth in real GDP, according to policymakers, is estimated to be 2.3% in the next year compared to 2.2% projection for 2026. While it was expected from the new Fed chairman, Kevin Warsh, to hold rates steady and move communication towards a hawkish bias, the market reaction highlights that the current positioning of the federal open market committee (FOMC) came as a surprise, with yields on 2Y Treasuries (which are most sensitive to inflation and changes in FFR) moving 2 standard deviations upwards (Figure 1). Such an upswing in terms of z-score is not unusual, given the volatile energy prices, yet the immediate reaction of the market to FOMC’s release was a climb by roughly 16 basis points to around 4.19% in 2Y yields. This implies that the market was expecting softer hawkish communication on the monetary policy.
Indeed, the FOMC participants’ assessments of appropriate monetary policy revealed that eight are expecting no change, one sees a cut, and nine anticipate at least one hike in 2026 (Figure 2). Eight members are inclining towards at least one hike in 2027, while the same number of participants are looking for at least one cut. The new Fed chairman decided not to provide his projection on the dot plot.
Further news for the market came at Warsh’s decision to abandon forward guidance. The reporter noted that while Kevin Warsh is dropping the forward guidance, markets are taking the dot plot’s projections as a way of forward guidance, with nine members seeing a rate increase by the end of the year. The new Fed chairman stated that “my colleagues around the table, when they submitted their dots, understand the world is changing quite quickly”. Warsh made it clear the Fed will aim to deliver price stability and provide a more proactive monetary policy in response to volatile and harder-to-predict inflation and labour data. Markets are pricing in one hike as soon as September this year, with 51.2% chance, and one more raise in FFR in January of 2027 (Figure 3).
The bottom line is that the Fed is moving away from building policy expectations among market players and towards a more proactive, responsive, and flexible approach in delivering its dual mandate. While this reduces predictability and puts additional challenges for market watchers, it provides clarity. Kevin Warsh himself highlighted that financial markets are better off when they react to the incoming data. In other words, financial markets should start to ask what data tells them and what happens in the real economy, rather than trying to predict what the Fed would do. In that sense, the Fed under new chairmanship will be strictly data-dependent and free of expectations (as long as it proves to be credible in commitments to stabilize price levels and maintain the labour market health).
2: Is labour market getting fundamentally stronger?
The May data reinforced the argument of the strengthening labour market, with non-farm payrolls growing by 172,000, and the April revised data showed 179,000 gains on net. While this indeed looks bold on the surface, a more important question is which industries added the greatest number of paid workers and whether cyclical sectors are starting to accelerate.
Leisure & Hospitality contributed to 70 thousand payroll gains last month, accounting for about 33% of total gains, with government and education providing 52 thousand and 40 thousand, respectively (Figure 5). Combined, these three categories accounted for 162,000 payrolls or roughly 76% of the total. While this does signal labour market strengthening, it should not be directly interpreted as a long-term, broad-based expansion in demand for labour. The May gains in leisure & hospitality (L&H) sit above its 3-month moving average by 56,000 and will be temporary in nature. This is because they are likely to be associated with the ongoing football World Cup in the US, which drives demand among restaurants, cafes, hotels, car rental, and other related businesses, thereby boosting demand for labour in the industry. As soon as the championship finishes, payrolls for L&H are likely to stay within the standard range. It means that the apparent large gains in payrolls hide temporary, rather than structural, improvement underneath, and thus it is too soon to say that the labour market is persistently and fundamentally strong.
However, there are more reliable signs of recovery in the labour market, which lays the foundation for possible structural and persistent bolstering. The share of low-cyclical industries in payroll gains has fallen from 66.2% to just 19.4% over the past year, with a clear downward trend (Figure 6), while the share of mid- to high-cyclical industries in payroll gains has risen from 33.8% to 80.6% over the same period of time, with clear upward trends (Figure 7). In other words, payroll gains’ structure is shifting from low to more pro-cyclical industries, indicating a potential increase in business confidence to hire in cycle-exposed industries and business cycle expansion. The heatmap reveals that professional & business services, mining & logging, construction, and manufacturing (durable goods) — industries the most exposed to swings in the business cycle — have been in a green territory for the past three months. The increase in payrolls in these industries is likely to be associated with AI-linked data center construction and manufacturing, which have more persistent positive benefits to the labour demand; however, it is important to note that as soon as data center construction and manufacturing associated with AI are over, there will be no reason to employ such a large pool of workers, as only a handful of them are needed to maintain operation of data centers and similar sites.
The textbook analysis of the greater demand for labour would predict rising wages as firms are increasingly competing for a limited number of labour. This is indeed captured by the average hourly earnings (AHE) statistics, with highly cyclical industries seeing the greatest 3-month annualized growth (Figure 8). The interpretation here is two-fold. On one side, it can be argued that inflation expectations, stemming from the ongoing energy crisis, easy financial conditions, capex boom, and supply chain bottlenecks, are spilling over to more cyclical parts of the economy, meaning that wages there are growing faster than in other parts of the economy. From the other side, it should be seen as the leading indicator of the broader economic expansion coming from historically high AI-linked capital expenditures and positive output gaps. For now, it seems that the former side is outweighing the latter as higher energy prices and supply chain disruptions are putting additional upward pressure on wages and prices, which will be examined in the next section. Yet, a rise in AHE among cyclical industries provides another sign of potential sustained labour market recovery.
The total job postings on Indeed follow the downward trend with occasional upswings. The most recent readings for June signal potential improvements but still sit below previous year levels (Figure 9). The sector composition highlights that job postings within manufacturing, project management, and engineering are at levels materially higher than the overall benchmark (Figure 10). This goes along with the previous findings that the share of mid and high-cyclical industries in payroll gains has been rising steadily amid the AI-linked buildout boom. Notably, postings for accountants fell from 110-120 to around 90. AI tools capable of automating some accounting tasks may be a contributing factor, though current adoption rates appear too low to fully explain a decline of this magnitude, suggesting other forces (cyclical demand, sector-specific hiring freezes) are also at work.
Looking ahead at the year-end and in the long run, it can be argued that the labour market in the US has somewhat stabilized with headline improvements in payrolls and a stable unemployment rate. More importantly, the diffusion index, which measures the breadth of employment gains in the economy, provides an optimistic outlook with consistent gains since October 2025 (Figure 11).
The bottom line is that the labour market in the US is far from getting fundamentally stronger but exhibits a meaningful positive trajectory and signs of possible structural and consistent health with a widening breadth of gains, but still the growth is substantially skewed towards jobs that are benefiting from AI frenzy. The essential determinant of labour market health is whether current gains are short-term or long-run in nature and thus whether the US economy will be able to provide a lasting, persistent, and structural demand for labour. Short-term tailwinds from the World Cup tournament will be in place. In the medium term, AI data center construction and capital expenditure boom will provide further upside for job gains and compression of unemployment rates; yet a more hawkish monetary stance and persistent inflationary expectations can suppress business confidence and demand for labour. In the longer term, the essential determinant of labour market health is how AI will evolve and impact the workforce practices.
It should be expected for unemployment to be steady with possible declines on the horizon, but a more important metric to watch now is the composition and breadth of both gains and losses as well, as how AI adoption rates and how firms are using it with respect to labour.
3: Higher For Longer
Inflation has been running well-above the inflation target for five years now. The most recent data on CPI and PCE show hot readings for both, with core values at 3.0% and 3.4%, respectively (Figure 12). Notably, even after the COVID-19 pandemic ended, inflation measures found it difficult to get materially close to the 2% levels, though the downward trend was noticeable. The closure of the Strait of Hormuz provided further tailwinds for price levels growth across major industries and production lines globally, including in the US. The Global Supply Chain Pressure Index (GSCPI) is at 1.77 – the highest level since 2023, indicating building cost pressures in supply chains as freighters and cargo aircraft find it increasingly difficult to navigate the complex and risky geopolitical landscape, with a greater risk premium embedded (Figure 14).
However, while the consensus view is that the current inflation upswing is stemming from the crisis in the Middle East (which is undoubtedly true to an extent), it is important to note that factors for higher inflation started to emerge even before the conflict:
1) Lagged impact of tariffs. The tariff impact on consumer prices has stayed limited by the end of 2025, with American importers swallowing most of the added cost rather than passing it on. Firms kept selling from inventory bought before the tariffs hit, and many hesitated to be seen hiking prices aggressively, choosing slow, incremental adjustments instead. With those pre-tariff stockpiles exhausted by the beginning of 2026, the pressure started to surface. History suggests these costs reach shelves gradually rather than all at once, and that lagged adjustment looks likely to run its course by 2026. Despite the Supreme Court striking down the tariffs, producers already rewired their supply chains and are unlikely to change them anytime soon, meaning that the higher costs of delivery, transportation, and sourcing are likely to stay. One of the clearest pieces of evidence for that is Mexico. Since “the Liberation Day” tariffs have been announced, Mexico experienced a substantial increase in wholesale trade, moving from negative into positive territory in 2025-2026. Yet, the retail trade remained relatively unchanged. The implication is that the rise in wholesale trade is driven by Mexico acting as the intermediary where goods are passing through the economy to bypass higher tariffs imposed by the US on China and other exporters.
2) Tighter labour supply. The level of monthly hiring required to hold unemployment steady appears to have dropped sharply from roughly 150,000 in early 2024 to about 30,000-50,000 by 2026, according to estimates from several regional Fed banks. The implication is that the labour market is running hotter than the headline jobless rate would imply.
This is significant as non-farm payrolls went up by 172,000 in May and have been running consistently higher than the breakeven levels for the past months (Figure 15). Furthermore, robust AHE and wage growth concentration in cyclical sectors reinforces greater cost pressure. Curiously, though, for all the attention on deportations, recorded employment across the most migrant-reliant industries (farming, food processing, homebuilding, health and child care) has held broadly flat, with no sign of native-born workers stepping in, no jump in automation spending, and no notable pay gains, yet production has not slipped. Once the full weight of deportations lands, shortages in these sectors should deepen, pushing wages up and feeding service-sector inflation, adding further price pressure through 2026 and beyond.
3) Loose monetary conditions & fiscal boom. The historically high capital expenditure boom linked to AI buildout, the One Big Beautiful Bill Act, tight credit spreads, and an accommodative monetary stance are driving inflation. OAS for both HY and IG bonds is sitting below the historical averages (Figure 16). With CPI at 4.3% and FFR within the 3.5-3.75 range, the effective policy rate is negative at the moment.
Moreover, if r-star has climbed 50 to 75 basis points, as the Cleveland Fed modelling suggests is plausible, then today’s stance is more accommodative than it appears, adding a further, structural source of inflationary pressure on top of the energy shock, tariffs, and tightening labour supply. This is further reinforced by the Taylor rule, which, by different measures, currently suggests about -1.82pp gap between the Taylor rule predicted rate and the current policy rate. All in all, the combination of rather accommodative credit conditions, fiscal stimulus, and substantial capex spending provides very strong tailwinds for inflation to stay well above the target.
With such an unfavorable inflation backdrop, irrespective of the Iran shock, the question is whether price pressures can materially ease once oil and gas prices are back to the pre-conflict levels. As noted, there are structural factors that drive it, but the recent data provide another set of indications that inflation is likely to stay “higher for longer”.
First, the relationship between 2Y yield and Brent oil became rather loose. Yield on 2-year treasuries continued to climb in April through June, largely ignoring the decline in oil prices amid hotter-than-expected May nonfarm payrolls and CPI data as well as hawkish Fed (Figure 17). In other words, inflation expectations in the short to medium-term will remain elevated even if Brent drops to $70/bbl. This can be partly explained by markets changing their attention from higher oil prices driving inflation to lower oil prices providing more growth and thus resulting in higher inflation.
More importantly, the gauge of acyclical inflation measure is now higher than the cyclical one for the first time since the pandemic (Figure 18). In other words, the rise in structural floor for inflation is already becoming evident in the data. This matters because the two components respond to different forces. Cyclical inflation is what monetary policy can directly influence. Acyclical inflation is driven by structural, sector-specific dynamics that rate hikes reach only weakly. With acyclical now exceeding cyclical, a growing share of inflation sits in components the Fed’s tools cannot easily compress, raising the floor beneath which inflation is unlikely to fall regardless of how restrictive policy becomes.
In the long-term perspective, markets are seeing inflation to be anchored with 5Y break-even inflation stabilizing around 2.21% (Figure 20). 10Y inflation expectations (red, Figure 19) also remain firmly anchored near the Fed’s target and have barely moved through the entire energy shock and tariff period, while the real yield (blue, Figure 19) has been climbing. The market is demanding higher real compensation, consistent with a higher neutral rate (r-star). The market’s anchoring deserves weight: long-run expectations have held near target through a pandemic, an energy shock, and a tariff regime. The simplest reading is that investors expect these pressures to fade.
Yet, it seems that markets are underestimating risks to the upside. Re-opening of the Strait of Hormuz has been priced in oil prices as if the strait is indeed truly open and transit is back to the pre-conflict levels, while the number of ships passing through remains significantly below normal. Markets appear to be overly optimistic on this matter. Importantly, should the conflict come to a complete end soon (which is not the case even after MoU has been signed as Iran and USA recently exchanged tit-for-tat strikes) and passage through the Strait of Hormuz recover, the restoration of these facilities would not be a simple “flip of the switch” because these sites involve high-pressure systems, volatile chemicals, and specialized global supply chains. It will take ~3-12+ months to restore the pre-conflict capacities and productivity levels, depending on the extent of the damage. Moreover, the mixed messaging from the US, Iran, and Israel officials indicated that there is still no clear and long-lasting agreement between the parties on how the conflict will end and under which conditions the Strait of Hormuz will operate, which raises the geopolitical premium.
The bottom line is that inflation is likely to stay higher for longer given very robust economic growth, fiscal, and credit impulses accompanied by greater supply-side pressures and tighter labour markets. Once the conflict resolves and supply chains improve, the disinflationary forces will appear and they have ground (anchored expectations, cooling shelter, and core measures drifting toward target), but they will come amid a structurally higher floor for inflation. On balance, the structural forces outweigh the disinflationary ones.
For investors, it means that yields are likely to stay elevated in the short to medium-term. The long-term outlook remains subdued with meaningful risks to the upside from the Iran conflict, higher geopolitical risk premium, and AI-buildout sucking in more resources with productivity-deflationary effects taking more time to take place than implied by market rates and corporate earnings.
For the Fed, the implication is that despite a very hawkish stance and commitment to price stability, the return to the inflation target within the range of the next 2-3 years remains rather unlikely, but not impossible. There is also the possibility that Warsh shifts the Fed’s emphasis toward an inflation gauge running closer to target (trimmed-mean PCE, say) to reinforce credibility. But such a move would not fool the bond market: vigilantes would price the underlying reality regardless of which metric the Fed emphasizes, potentially pushing long-end yields higher.
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Disclaimer
This report is published by New World Investment Research (NWIR) for informational and educational purposes only. It does not constitute investment, financial, legal, or tax advice, nor an offer or solicitation to buy or sell any security or financial instrument. NWIR is not a registered investment advisor, and nothing herein should be construed as personalized investment advice.
The analysis reflects the author’s opinions as of the date of publication and is subject to change without notice. It contains forward-looking statements and projections that are inherently uncertain and may differ materially from actual outcomes. Data is drawn from third-party sources believed to be reliable, including the Bureau of Labor Statistics, the Federal Reserve, the Bureau of Economic Analysis, and others, but NWIR does not guarantee its accuracy or completeness.
Readers should conduct their own research and consult a licensed financial professional before making any investment decision. NWIR accepts no liability for any loss arising from reliance on this report.
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