Wall Street forecasts the US economy will maintain solid growth of around 2.0% (annualized quarter-on-quarter) next year, driven by expanding artificial intelligence investment, interest rate cuts, and tax reduction policies.
Given that the US economy is 16 times the size of South Korea's and Korea's growth outlook for this year and next remains in the 1% range, this represents an exceptionally fast growth pace. Wall Street expects employment and consumption to slow as companies adopt AI, but anticipates inflation from President Donald Trump's tariffs will stabilize from the second half of next year.
Major investment banks also expect at least two rate cuts next year, diverging from the Federal Reserve's projection of just one cut. This suggests Wall Street takes a slightly more optimistic view on next year's inflation than monetary policy authorities.
Key variables for the US economy next year include the Supreme Court's ruling on tariff legality, policy changes ahead of the November 3 midterm elections, and whether stock prices will continue rising, particularly for AI-related stocks.
BOK New York Office Compiles Wall Street Views: "2.0% US Growth, Expanded AI Investment, Slower Employment and Consumption"
The Bank of Korea's New York office held a press briefing at its Manhattan office on December 19 (local time), releasing a report on next year's US economic outlook compiled from Wall Street investment banks' views.
According to the BOK New York office, the median forecast for next year's US economic growth from 66 Wall Street investment banks as of December 15 was 2.0%. This matches the median growth forecast for this year (2.0%).
The Fed had previously raised its 2026 US growth forecast from 1.8% to 2.3% at its December 10 Federal Open Market Committee meeting. This indicates Wall Street's view on US growth is more conservative than the Fed's.
For reference, US GDP growth is calculated on an annualized basis assuming the current growth pace continues for a full year, compared to the previous quarter. This differs from countries like Korea that calculate GDP growth by comparing to the same period last year. Last month, the Bank of Korea forecast Korea's economic growth at 1.0% this year and 1.8% next year.
"Next year, US personal consumption growth will narrow due to sluggish employment and rising prices," the BOK New York office said, adding that "reduced household and corporate tax burdens from the 'One Big Beautiful Bill Act' (OBBBA) and lower interest expenses from rate cuts will partially offset the consumption slowdown and support investment."
"Corporate investment in particular will show solid growth in areas beyond AI, backed by investment capacity secured through tax cuts," the office added. "Government spending delayed by the federal shutdown will be executed in the first quarter of next year, also contributing to growth."
OBBBA is legislation that extends temporary corporate tax cut provisions from Trump's first term in 2017 rather than letting them expire at year-end. Trump signed it on July 4.
Personal consumption by Americans next year is expected to be constrained as wage growth has continued to slow since 2022 and tariff-driven price pressures emerge. The median personal consumption growth forecast from 61 investment banks dropped from 2.5% this year to 1.9% next year—meaning many on Wall Street expect consumption growth to fall short of overall economic growth.
"Tax refunds from OBBBA expected to be distributed between February and April next year, along with continued stock market gains, may support consumption," the BOK New York office said, but noted concern about "worsening consumption imbalances between high-income households, who account for 70% of net worth, and other income groups."
The BOK New York office expects corporate investment to continue expanding next year, centered on AI. Hyperscalers' capital expenditure growth is projected to reach 33% next year—lower than this year's 69% but still substantial. The office sees the Trump administration's tax cuts boosting corporate investment capacity and stimulating capital investment beyond AI.
Trump Tax Cuts to Widen Fiscal Deficit, Negative for GDP... Next Year's Inflation to Peak in First Half
US federal finances are expected to see a widening deficit as OBBBA reduces tax revenue. The BOK New York office projects OBBBA will boost US GDP by 0.4 percentage points next year by stimulating consumption and investment, but will simultaneously deepen the fiscal deficit, ultimately causing a larger GDP reduction than the growth contribution.
The average federal fiscal deficit-to-GDP ratio forecast by five investment banks is 5.8% for this year and 6.1% for next year. The US federal deficit, which stood at around $36 trillion (approximately 53,300 trillion won) when Trump won the election last November, surpassed $38 trillion (approximately 56,000 trillion won) in October.
The labor market is expected to continue slowing next year due to Trump's immigration restrictions and companies cutting labor costs in response to tariffs. Hiring is expected to expand only after rate cut effects materialize in the second half and tariff pass-through to consumer prices is complete.
The median unemployment rate forecast from 44 investment banks for next year was 4.4%, unchanged from this year—matching the Fed's December 10 projection.
"While it's difficult to view AI adoption as a major factor in current employment slowdown, it is negatively affecting some sectors including technology," the BOK New York office noted. "The prevailing expectation is that these negative effects are short-term, and AI will create new jobs and increase employment in the long run."
The BOK New York office expects US wage growth to decline further next year from this year due to weak employment, though wages will likely grow somewhat faster than inflation. On December 17, Trump had declared during a roughly 20-minute nationally televised address from the White House that "we are on the verge of an economic boom the likes of which we've never seen" and that "for the first time in years, wages are rising significantly faster than inflation."
The BOK New York office projects US inflation will peak in the first half of next year before declining in the second half. As tariff pass-through to prices is completed in the first half, the base effect will slow inflation in the second half. The office estimates the current tariff pass-through rate reflected in prices at 20-40%, with the final pass-through rate at 60-70%.
The median annual US inflation forecast from 56 investment banks for next year was 2.7%, slightly higher than this year's 2.6%. This differs somewhat from the Fed's December 10 projections of 2.9% for this year and 2.4% for next year. The BOK New York office identified the Supreme Court potentially invalidating reciprocal tariff measures under the International Emergency Economic Powers Act (IEEPA) as the biggest variable for inflation, which could increase trade policy uncertainty.
Two Rate Cuts Expected, Differing from Fed... "Hassett Favored for Next Fed Chair"
According to the BOK New York office, Wall Street investment banks expect an average of two rate cuts next year, differing from the Fed's projection of just one.
Among 10 surveyed investment banks, two (JPMorgan, Deutsche Bank) expect a 0.25 percentage point cut, six (Goldman Sachs, Morgan Stanley, Wells Fargo, Barclays, Bank of America, Nomura) expect 0.50 percentage points, and two (Citi, TD Bank) expect 0.75 percentage points.
According to the CME FedWatch tool on December 21, the fed funds futures market assigns the highest probability of 30.8% to a 0.50 percentage point rate cut by year-end next year. The probability of a 0.75 percentage point cut is 26.5%, 0.25 percentage points is 19.3%, 1.00 percentage point is 13.5%, and no change is 5.0%.
