The outlook for the next 12 months remains positive, but the next year will depend on whether consumer spending, productivity and business spending can offset inflation, higher financing costs and a potential growing labor shortage.

We cannot ignore the risk of politics either. Depending on the mid-term election results, the risk is that fiscal policy could become stalemated with no substantive legislation being passed.

The most likely path for the economy over the next 12 months is continued growth that may be uneven. The current median forecast from the Bloomberg survey of economists is for GDP growth to remain slightly above 2% for the next 12 months. The reality is that growth may be concentrated in big businesses and high-income earners (i.e., the K-shaped economy).

The consumer should remain the primary driver of economic growth, but the story will remain one of bifurcated spending. Real average weekly earnings have slipped into negative territory, which indicates the average worker’s salary is not keeping pace with inflation. Upper income earners continue to have other sources of income (interest, dividends, business) that should support their continued spending.

Business spending should remain solid as businesses continue to take advantage of tax breaks from the One Big Beautiful Bill act to invest in productivity initiatives. Spending tied to power generation, transmission lines, defense, advanced manufacturing, and data centers look to be the drivers of business spending. The key question is whether business spending is broad based or if it is concentrated in a relatively narrow group of large projects and industries.

Monetary policy will create a headwind as interest rates are likely to remain elevated as long as the war with Iran continues and trade policy remains restrictive. The key is what happens with inflation. 

Trade and labor supply remain the wildcards that could hurt or improve the current outlook. Setting aside the noise from the media surrounding tariffs, at its core tariffs raise the cost of doing business for those businesses who cannot adjust their supply chains. The Congressional Budget Office expects higher tariffs to reduce real output compared to no tariffs on a net basis (expenses created versus revenues generated).

On the labor front, an aging workforce, declining birth rate and reduced immigration create the risk of a growing labor force problem. The key is whether businesses will be able to increase productivity to sufficiently offset the loss of labor supply.

In summary, the next 12 months may be a tug-of-war between solid business and consumer spending on one side versus high interest rates, inflation and limited labor force growth on the other. The important indicators to watch are inflation, jobs growth, consumer spending, productivity, business spending and the level of interest rates.

Steve Scranton, CFA, is an economist for Spokane-based Washington Trust Bank.