The U.S. economy appears to be resilient on the surface, but a new UBS report shows that the foundation underneath is remarkably less stable.
UBS economist Jonathan Pingle and his team warn that the economy is running on a narrow engine in AI investment, while broad swaths of the economy remain sluggish. Consequently, the next few years might be a lot bumpier than the headline numbers suggest.
“Despite the headline resilience, sources of growth are narrow,” Pingle wrote.
In terms of hard numbers, UBS now expects real U.S. gross domestic product to rise to 2.2% in 2026, before gradually increasing to 2.6% by 2028. However, that path will most likely be uneven as macro pressures continue to build simultaneously.
Of late, the U.S. economy has been losing a lot of altitude, and the Iran war has only taken things up a notch or two.
For perspective, Q4 GDP growth was revised down to a 0.7% annualized pace, while real consumer spending rose just 0.1% in January, Reuters reported.
At the time, inflation remains sticky in the wrong places.
For context, Reuters notes that core PCE increased by 3.1% year over year in January, its fastest pace since March 2024, though February CPI held steady at 2.4% and core CPI at 2.5%.
Things have gotten even more tumultuous since the Iran war began on Feb. 28. Per Reuters, Brent crude skyrocketed about 40% from around $73.70 a barrel before the conflict to $103.14.
The labor market has also begun showing signs of strain.
Nonfarm payroll employment excluding health care has been dropping by nearly 52,000 jobs per month over the past eight months, according to UBS, pointing to underlying softness.
That also leaves the Federal Reserve in a precarious position as it navigates a remarkably testing backdrop, where the market is dependent on a small cluster of high-tech investments.
U.S. GDP climbed sharply from 2020 through 2025
- 2020: $21.38 trillion
- 2021: $23.73 trillion
- 2022: $26.05 trillion
- 2023: $27.81 trillion
- 2024: $29.30 trillion
- 2025: $30.77 trillion
Source: Federal Reserve Bank of St. Louis (FRED), U.S. Bureau of Economic Analysis
AI investment is quietly carrying much of the U.S. economy
AI is currently doing an outsized share of the lifting for the U.S. economy.
The incredible scale at which the biggest in tech are spending is remarkably striking.
For perspective, in 2025 alone, Amazon spent $131.8 billion on property and equipment, reported 27/7 Wall St, saying that the 50.7 billion year-over-year increase was linked to AI investments.
Google parent Alphabet spent $91.4 billion on capex in the same year and expects those investments to continue rising as it develops more servers, networking equipment, and data centers, per Yahoo Finance.
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On top of that, Meta Platforms added $72.2 billion in capex in 2025 and guides toward a whopping $115 billion to $135 billion in spending for 2026, according to InsiderFinance.
In addition, Microsoft reported $64.6 billion in property and equipment additions in fiscal 2025, along with $32.1 billion in commitments linked primarily to data-center expansion.
If you combine the four tech giants, they’ve collectively dropped roughly $360 billion in capex over the last year.
We’re seeing those ripple effects on the broader economy, too.
According to the Census Bureau, private construction fell 2.9% in 2025, while private nonresidential construction also decreased by 3.1%.
However, despite the apparently sluggish figures, some of the categories linked with computing infrastructure did far better.
For instance, private office construction jumped 2.6%, while private power construction climbed 2.7%.
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Tariffs create new inflation risks for the Federal Reserve
Tariffs are perhaps the biggest complication for the U.S. economic outlook at this point, including for the Fed.
UBS economists are of the view that tariffs will result in stronger inflationary pressures, while parts of the economy buckle under pressure.
According to the bank’s analysis, the effective U.S. tariff rate has surged to a worrying 11.5%, up from just 2.5% at the beginning of 2025.
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And those higher costs don’t stop at the border.
In fact, UBS estimates that tariffs alone could add 0.7 percentage points to core PCE inflation this year, a key metric the Federal Reserve uses when deciding whether to cut or hold interest rates steady.
For some color, core PCE inflation is still running hot at 3%, above the Fed’s long-term 2% target. At the same time, we’re seeing the broader economy show signs of uneven momentum, with job growth weakening across a wide range of sectors, apart from healthcare and AI-led spending.
That’s why UBS expects the Fed to move cautiously.
It forecasts just a couple of quarter-point rate cuts this year, bringing the federal funds target range down to 3% to 3.25% by year’s end.
It’s important to note that the latest CME FedWatch read is expected to hold rates steady at 3.50% to 3.75% at the March 17-18 meeting.
Latest 2026 U.S. real GDP growth forecasts
- Goldman Sachs: 2.6%
- Morgan Stanley: 2.4% (full-year forecast)
- Bank of America: 2.4% (Q4)
- IMF: 2.4%
- J.P. Morgan: 2.2% (2026 average; its March update also said 2% year over year by Q4 2026)
Sources: Goldman Sachs Research, Morgan Stanley Research, Bank of America Global Research, J.P. Morgan Asset Management, IMF
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