Visa’s Updated U.S. Economic Outlook
This morning Visa ($V) published its updated look at the U.S. economy:
Over the last couple of months, we assumed the conflict would be short lived. This month we have once again revised this view and expect the conflict to last through early summer. While we think most of the upside to oil prices has subsided, it will likely take some time for traffic to begin moving through the Strait of Hormuz and for oil production to recover enough to rebuild global inventories. As a result, we now see oil and gasoline prices remaining elevated through at least Q3 of this year, resulting in higher inflation for longer.
This revised set of assumptions has a few material impacts on our outlook for this year and next. For starters, we now see inflation peaking around 3.9 percent on a year-over-year (YoY) basis this quarter as measured by the PCE deflator. The duration of elevated oil and gas prices has also led us to upwardly revise core inflation, which excludes food and energy prices, suggesting that higher energy prices will be passed on through other consumer goods as well. The good news is that the labor market still appears to be on solid footing. With higher headline and core inflation and job growth continuing, we no longer expect any interest rate cuts from the Federal Reserve this year and expect only one 25-basis-point cut in late 2027.
Higher inflation also has the effect of taking a bite out of consumer spending as real (inflation-adjusted) income growth is expected to reach stall speed towards the middle of this year, weighing on real consumer spending. We now expect the economy to grow 2.2 percent YoY this year, down from our estimate of 2.5 percent last month. Inflation pressures should ease next year, which should help lift real income growth once again, but only modestly. We are not expecting much change in next year’s growth outlook, with GDP likely expanding at the same 2.2 percent pace as this year.
In the back of Visa’s May report, on page 3, thumbing through its quarterly forecasts, we find the following:
Q1 2026 GDP: 2.0%
Q2 2026 GDP: 2.3%
Q3 2026 GDP: 2.3%
Q4 2026: GDP: 2.6%
Q1 2027: 2.1%
Q1 2026 CPI: 2.7%
Q2 2026 CPI: 3.8%
Q3 2026 CPI: 3.7%
Q4 2026 CPI: 4.2%
Q1 2027: 3.7%
Position: None
