US Economy: Inflation Risks Loom Despite Strong Growth – February 2026 Outlook
WASHINGTON — The U.S. Economy demonstrated surprising resilience through the early weeks of 2026, continuing to grow despite the protracted federal government shutdown that began on October 1, 2025. According to the Federal Reserve Bank of Atlanta’s GDPNow model, economic growth reached 3.9% in the third quarter, a figure that defied expectations given the disruption to economic data collection.
The shutdown, stemming from a congressional impasse over funding bills, halted the release of key economic indicators, including the monthly jobs report and initial estimates of third-quarter gross domestic product. The Bureau of Economic Analysis was forced to postpone its scheduled GDP release, and the Labor Department delayed the September jobs report. However, the agency temporarily restored workers to publish the September consumer price index, a critical component of Social Security cost-of-living adjustments.
Despite the data blackout, the Atlanta Fed’s nowcast suggests the economy remained robust. This resilience has prompted debate among economists regarding the appropriate monetary policy path. Some experts, like Kenneth Kuttner, a professor of economics at Williams College, expressed concern that the Federal Reserve was “flying blind” without crucial data as it prepared for its meetings to set interest rates. “The economy could be at an inflection point,” Kuttner told ABC News in October 2025.
Recent labor market indicators suggest a stabilizing trend. Nonfarm payrolls growth, after a slowdown in the six months leading up to October 2025, has averaged 73,000 monthly gains since then. The unemployment rate has remained within a narrow band of 4.2% to 4.4% since February 2025. The Employment Cost Index and hourly earnings data continue to point to robust nominal income gains, while the ISM employment indexes have rebounded from earlier depressed levels.
Household wealth remains at record highs, fueled by gains in equities and real estate. Low debt levels among established households, coupled with historically low interest rates locked in following the pandemic, are supporting renovation activity and discretionary spending. However, consumer sentiment, as measured by the University of Michigan, remains significantly below its five-year and historical averages, reflecting concerns about the impact of sustained inflation on real incomes.
Businesses share a similar cautious outlook, benefiting from strong conditions but wary of potential headwinds. Supply constraints related to tariffs and potential labor shortages, combined with consumer financial anxiety, pose challenges to pricing power. Firms are prioritizing investments in efficiency and productivity rather than expanding capacity.
Analysts at Westpac Economics have cautioned that sustaining current growth rates while simultaneously bringing inflation down to the Federal Reserve’s 2.0% target will be difficult. Core services inflation stood at 2.9% year-over-year in January, approaching 5.0% on an annualized basis. They have revised their forecast for the final rate cut in the current cycle from March to June 2026, acknowledging the possibility that the Federal Open Market Committee (FOMC) may choose to remain on hold for an extended period.
This view diverges from current market pricing, which anticipates two rate cuts by year-conclude and a high probability of another by June 2027, partly influenced by the anticipated change in leadership at the Federal Reserve. Kevin Warsh is scheduled to succeed Jerome Powell as FOMC Chair in May. However, Westpac Economics argues that such a course would require a significant deterioration in the labor market or a rapid easing of inflationary pressures, outcomes they currently deem unlikely.
The delayed release of the third-quarter GDP report, originally scheduled for October 3, 2025, remains postponed as the government shutdown continues. The Commerce Department has not yet announced a date for its release.