TD Securities strategists expect United States output growth to move sideways through 2026, with their Gross Domestic Product (GDP) tracker currently at 2.5% quarter-on-quarter annualized. Full-year growth is projected to land slightly below trend at 2.1% Q4/Q4, according to the bank’s latest economic outlook released this week.
The forecast carries a notable warning: the US economy faces stagflation risks, a scenario where growth stagnates while inflation remains stubbornly above target. That combination would put the Federal Reserve in a difficult position, as policy tools that address one problem often exacerbate the other.
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What the Numbers Show
TD Securities’ GDP tracker, which provides a real-time estimate of economic momentum, sits at 2.5% annualized for the current quarter. That figure is modestly above the bank’s projection for full-year growth of 2.1%, implying some softening in activity as the year progresses.
The 2.1% full-year estimate is slightly below the long-run trend rate of US growth, which the Congressional Budget Office pegs at around 1.8% to 2.0% for potential output. While a 2.1% print would still represent an expansion, the bank’s characterization of “sideways” growth suggests a plateau rather than acceleration.
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Key components of the forecast include:
- Consumer spending: Expected to remain resilient but gradually cooling as pandemic-era savings dwindle.
- Business investment: Moderate growth, with firms cautious about borrowing costs and policy uncertainty.
- Government spending: A modest drag as fiscal stimulus fades and budget battles continue.
- Net exports: A slight positive contributor, supported by a weaker dollar.
Why Stagflation Is Back in the Conversation
The stagflation warning from TD Securities is not an isolated view. Several economists have revived the term in 2026 as inflation readings have proven stickier than expected, even as growth indicators have softened.
Inflation, as measured by the Consumer Price Index, has remained above the Fed’s 2% target for much of the year, driven by shelter costs, insurance premiums, and services prices. Meanwhile, manufacturing activity has contracted in several regional surveys, and the labor market has shown signs of cooling, with monthly job gains averaging below 100,000 in recent months.
This combination — subpar growth with elevated inflation — is the classic stagflation setup. The last sustained period of stagflation in the US was in the 1970s, when oil price shocks and loose monetary policy produced double-digit inflation and high unemployment.
The current environment differs in important ways. Inflation is far lower than in the 1970s, and the labor market, while cooling, remains historically tight. Still, the risk is real enough that TD Securities is flagging it explicitly.
Implications for the Federal Reserve and Markets
For the Federal Reserve, stagflation is the worst-case scenario. The central bank’s dual mandate — maximum employment and price stability — becomes a balancing act when growth slows and inflation persists.
If the Fed keeps rates high to fight inflation, it risks tipping the economy into recession. If it cuts rates to support growth, it risks entrenching inflation expectations. The market is currently pricing in a series of rate cuts starting later this year, but those expectations could shift quickly if inflation data surprises to the upside.
For investors, the implications are mixed. Equities have historically struggled during stagflationary periods, as corporate profit margins compress when input costs rise and pricing power fades. Bonds offer some protection, but real yields may stay negative if inflation runs above nominal yields.
TD Securities’ forecast suggests a cautious approach to risk assets, with a preference for sectors that can pass through price increases, such as energy and consumer staples.
What to Watch Next
The key data points to monitor over the coming months include:
- Monthly CPI and PCE inflation reports — any acceleration would reinforce stagflation concerns.
- Nonfarm payrolls — a sharp drop in job creation would signal the growth slowdown is deepening.
- Federal Reserve communications — especially the September and December FOMC meetings, where rate decisions will be made.
- Q3 GDP advance estimate — due in late October, which will confirm whether the sideways trend is holding.
The stagflation debate is likely to intensify as the year progresses. For now, TD Securities’ forecast serves as a sober reminder that the post-pandemic recovery has matured, and the next phase of the cycle may be less forgiving.
This article is for informational purposes only and does not constitute financial advice. Economic forecasts are inherently uncertain, and markets are volatile. Readers should conduct their own research or consult a qualified financial advisor before making investment decisions.
