Second Half of 2026 Economic Outlook: Business Investment Supports Growth as Consumers Pull Back

The U.S. economy is still growing, but the picture looks different depending on where you sit. Businesses are pouring money into artificial intelligence, data centers, and other tools that boost productivity. Meanwhile, households are feeling the squeeze from high energy costs, slow income growth, and inflation that won’t quite let up.

The result is an economy that’s holding steady overall but with real pressure points. Cautious consumers, slower hiring, high borrowing costs, and ongoing geopolitical uncertainty will likely shape business conditions for the rest of 2026.

Early Signs of Stabilization in 2026

The Leading Economic Index, a measure that tracks where the economy may be headed, rose 0.1% in May after a 0.2% increase in April. Two months of gains in a row is a modest but encouraging sign that parts of the economy may be leveling out.

Rising stock prices and a wider gap between long- and short-term interest rates helped lift the index. A related measure of current activity, the Coincident Economic Index, also ticked up, supported by payroll employment, personal income, manufacturing and trade sales, and industrial production.

Still, the Leading Economic Index remains negative over both the past six and twelve months. That’s a signal not to read too much into the recent improvement. The Conference Board expects GDP to grow 1.8% in 2026, down from 2.1% in 2025.

Another closely watched measure, the Chicago Fed National Activity Index, moved in the opposite direction, falling from 0.19 in April to -0.10 in May. Production, employment, consumer spending, and housing all dragged it down.

Business Investment Is Carrying More of the Load

One of the clearest trends in the May data is that businesses are spending heavily on AI, data centers, software, and other new technology, and that spending is helping prop up the broader economy while household demand softens.

Forecasts call for business investment to grow 5.4% in 2026, well ahead of overall GDP growth or consumer spending. Pretax corporate profits are expected to rise 8.8%.

That creates two different economic realities. Technology-focused companies and businesses with capital to invest may find real opportunity right now. Businesses that rely on discretionary consumer spending may have a tougher road ahead.

For business owners, this is a good time to think about investments that improve productivity, automate routine tasks, sharpen decision-making, or reduce reliance on hard-to-find labor.

Consumers Are Pulling Back in H2 2026

Consumer confidence dipped slightly in May as households grew less positive about current business and job conditions. Expectations for the next six months improved a bit, but more people are worried about their future income and the odds of a recession.

The University of Michigan’s Consumer Sentiment Index sent an even stronger warning, falling five points to 44.8 — its third straight monthly decline. Consumers reported feeling worse about their personal finances, their ability to afford big purchases, and the economy’s near- and long-term direction.

Inflation is a big part of the story. Consumers now expect 4.8% inflation over the next year and 3.9% over the long term. Rising gas prices tied to conflict in the Middle East have added to the unease.

Consumers haven’t stopped spending, but they’re spending differently. Necessities, affordable experiences, used vehicles, and value purchases are getting more attention, while big-ticket discretionary services are taking a back seat, with a few exceptions like travel, fitness, amusement parks, and gambling.

Small Businesses Are Feeling the Pressure Too

Small-business optimism slipped in May and remains below its long-term average. Stronger earnings and inventory expectations weren’t enough to offset weaker hiring plans and fewer job openings.

Only 9% of owners, on net, plan to add jobs over the next three months, down four points from April. And for the ones who are hiring, finding qualified candidates isn’t getting any easier—46% report few or no qualified applicants.

In other words, the labor market is cooling overall, but that doesn’t mean it’s getting easier for every employer. Specialized roles remain hard to fill even as general hiring slows.

Inflation, financing costs, wages, and uncertain demand continue to weigh on small-business decisions. It’s a good time to be selective about hiring and capital spending and to focus resources where they’ll produce measurable results.

Interest Rates Are Holding Steady, For Now

The Federal Reserve has maintained the federal funds target range at 3.50% to 3.75% through its most recent meeting in June 2026. While inflation has continued to ease, it remains above the Fed’s long-term 2% target, prompting policymakers to take a cautious approach. The Fed continues to balance its dual mandate of promoting maximum employment and maintaining price stability as it evaluates incoming economic data before making any changes to interest rates.

According to the Fed, economic activity is expanding at a solid pace, but job growth remains low, and rising global energy prices are adding to inflation pressure.

Higher rates continue to affect borrowing, investment, and real estate. The average 30-year fixed mortgage rate climbed to 6.53% by the end of May, up from 6.30% a month earlier. Existing-home sales improved in most regions, but real estate professionals grew less optimistic, and forecasts for 2026 home sales were revised sharply downward.

What the 2026 Economic Outlook Means for Business Owners

The outlook for the rest of 2026 points to moderate growth with real risks attached. There’s no clear sign of an imminent recession, but there’s also no sign of a fast, broad-based expansion.

Persistent inflation, high energy prices, cautious consumers, elevated interest rates, and slower job growth could all limit how much the economy expands. Strong corporate profits and continued technology investment may help offset some of that pressure.

For now, it’s worth keeping a close eye on customer demand, protecting cash flow, and reviewing expenses carefully. Investments in AI and automation can create a real advantage, but they work best when they’re tied to a clear business goal rather than adopted just because everyone else is doing it.

The biggest theme to watch through the rest of 2026 is the gap between cautious households and confident, investment-minded businesses. Understanding how that gap affects your customers, your workforce, and your industry will put you in a stronger position going forward.

If you have questions about how these trends might affect your business’s tax planning, cash flow, or financial strategy, CJG Partners is here to help. Reach out to us today to talk through what the 2026 economic outlook means for you.

The information in this blog was drawn from the May 2026 Economic Outlook Update, published by Business Valuation Resources (BVR), which compiles data from the Federal Reserve, U.S. Department of Commerce, U.S. Department of Labor, U.S. Census Bureau, The Conference Board, and other respected economic sources. Learn more at BVResources.com.