The economy is growing despite anemic payroll employment gains. That can only happen if productivity growth accelerates and raises real wages enough to offset the weakness in employment. The question is whether productivity growth will continue to do so. It will in our Roaring 2020s scenario. The risk is that stronger real wages don't more than offset weaker employment, which would depress personal income and consumption. This is our primary concern in our 2026 outlook.
Today's batch of economic indicators on balance supports our Roaring 2020s narrative:
(1) Real GDP growth remains strong. Following today's employment and retail sales reports, the Atlanta Fed's GDPNow model indicates that real GDP growth in Q3 is tracking at 3.5%, down from the previous estimate of 3.6% (chart). The forecast for real consumer spending growth during the quarter remained at a solid 2.7%. Capital spending on equipment and intellectual property (including software) is particularly robust.
