The difference between 3.1% growth and 2.3% growth might seem small when we just look at the mathematical 0.8% difference between these two numbers. But that approach hides the actual impact. The graph better illustrates just how important that difference is by showing how far apart the two trend lines become over time. The reality is that our economy would be roughly 15% larger today had we continued to grow at 3.1%. Today the U.S. economy is $32 trillion; had we continued to grow at 3.1%, the economy would be $5 trillion larger.
That downstream effect would be huge. To name a few, median household income would be greater, employment opportunities would be more plentiful, federal tax revenue would be larger, the U.S. national debt would be lower, etc., etc. By almost any measure, we would be significantly better off.
The point of reviewing this history is not to create angst as much as it is to explain the angst Americans seem to feel, as several long-term tracking psychiatric surveys show. The combination of slower growth and inflation’s affordability impact hits everywhere; employment seems tentative to many, household incomes feel squeezed, and the American dream appears threatened. In short, we keep inching our way forward (the economy is still growing), but we have very little margin for error. We could slip into a recession, or we could experience a resurgence.
The Corporate Profit Crystal Ball
Fortunately, we can measure the likelihood of recession vs. resurgence, and here there is ample good news. The bottom line of economic growth is cumulative corporate profits. Profits are what drive investment (companies won’t invest to produce what isn’t profitable) and thus the growth of the U.S. economy.
Since we want to look forward – what’s the expectation of future profits and thus future growth – we can look at the interest rate corporations have to pay to raise money to invest. That interest rate is impacted by the perceived risk of lending to these companies and is measured by “corporate credit spreads” (the difference in rates between a corporate bond and a U.S. Treasury bond). If profits are going up, the spread decreases, reflecting reduced risk; if profits are going down, the spread increases, reflecting increased risk.
The chart below shows the movement in corporate credit spreads over time since 1997, with gray bars indicating recessions. Whether we look at investment-grade or high-yield corporate bonds, spreads have decreased and remain low, which is consistent with a strong outlook for corporate profits.
Economic Commentary – Fourth Quarter Observations
Thus far, 2026 has proven to be a volatile year. Geopolitical events and inflation expectations have been the main drivers of the overall market’s performance this year, but despite those squalls, performance has remained remarkably positive. As we push through the 4th quarter and into 2027, world events and Fed actions will continue to be significant drivers, but underlying infrastructure trends are likely to keep pushing the economy in a positive direction.
A Little History Goes A Long Way
Let’s first understand the potential trajectories of the U.S. economy. The chart below compares the long-term 3.1% trend the U.S. economy is capable of achieving with the actual trend in the years since the 2008 mortgage meltdown. As a result, and from that year forward, the U.S. economy has been trending on a 2.3% annual growth rate, with only one notable exception: the COVID era lockdowns significantly retrenched the economy and could very well have put us on an anemic path. Fortunately, most of the mistakes made in reaction to COVID have been repaired, and we returned to at least the 2.1% growth line.
The difference between 3.1% growth and 2.3% growth might seem small when we just look at the mathematical 0.8% difference between these two numbers. But that approach hides the actual impact. The graph better illustrates just how important that difference is by showing how far apart the two trend lines become over time. The reality is that our economy would be roughly 15% larger today had we continued to grow at 3.1%. Today the U.S. economy is $32 trillion; had we continued to grow at 3.1%, the economy would be $5 trillion larger.
That downstream effect would be huge. To name a few, median household income would be greater, employment opportunities would be more plentiful, federal tax revenue would be larger, the U.S. national debt would be lower, etc., etc. By almost any measure, we would be significantly better off.
The point of reviewing this history is not to create angst as much as it is to explain the angst Americans seem to feel, as several long-term tracking psychiatric surveys show. The combination of slower growth and inflation’s affordability impact hits everywhere; employment seems tentative to many, household incomes feel squeezed, and the American dream appears threatened. In short, we keep inching our way forward (the economy is still growing), but we have very little margin for error. We could slip into a recession, or we could experience a resurgence.
The Corporate Profit Crystal Ball
Fortunately, we can measure the likelihood of recession vs. resurgence, and here there is ample good news. The bottom line of economic growth is cumulative corporate profits. Profits are what drive investment (companies won’t invest to produce what isn’t profitable) and thus the growth of the U.S. economy.
Since we want to look forward – what’s the expectation of future profits and thus future growth – we can look at the interest rate corporations have to pay to raise money to invest. That interest rate is impacted by the perceived risk of lending to these companies and is measured by “corporate credit spreads” (the difference in rates between a corporate bond and a U.S. Treasury bond). If profits are going up, the spread decreases, reflecting reduced risk; if profits are going down, the spread increases, reflecting increased risk.
The chart below shows the movement in corporate credit spreads over time since 1997, with gray bars indicating recessions. Whether we look at investment-grade or high-yield corporate bonds, spreads have decreased and remain low, which is consistent with a strong outlook for corporate profits.
Anecdotal, but nonetheless significant commentary, supports this interpretation. Larry Fink, Chairman and CEO of BlackRock, which is the largest investment management company in the U.S., believes we are on the cusp of one of the greatest growth cycles in American history. His view counts because it determines whether, where, and how BlackRock invests shareholder money, and his job depends on getting it right. He has gravitas.
He further points out that this growth, which will most likely play out in the buildout of AI and AI infrastructure, will keep us at the forefront of competitiveness internationally and should ultimately help us tackle what would otherwise be an unsustainable national debt level.
Inflation As A Stumbling Block
Our current economic situation and the prospects for resurgence also depend on how the Fed manages interest rates. Regardless of whether corporate spreads are low or high, if the underlying U.S. Treasury Rate is too high, investments get sidelined. Their job isn’t easy, trying to balance economic growth against inflation concerns, and they look to the CPI for guidance on the success of their efforts. While their goal is to achieve an average 2% inflation rate, they realize that the CPI contains some prices which are historically extremely volatile. One way of stripping out that volatility – to look at “core” inflation – is to use CPI minus food, energy & shelter.
The chart below shows the movement over recent history of total CPI (blue line) vs. this Core CPI (red line). Both spiked in the aftermath of monetary easing because of COVID, and both have decreased in the years following.
While total CPI stands at roughly 3.4% (above the Fed target), Core CPI stands at 2% (on target), and much of the difference can be explained by the Iran war’s impact on energy costs. The downward trend in both and the likelihood that Iran’s impact on energy prices is waning strongly implies the Fed will not have to increase interest rates as much total CPI might suggest or as much as some commentators have feared.
Iran As A Stumbling Block
The war with Iran has interrupted oil deliveries, increased energy prices and accordingly created greater-than-usual geopolitical turmoil. Iran’s geographical location has given it an outsized impact on the U.S. and world economies. But having played that card, Iran has decreased the effectiveness of the threat it represented to the world economy.
Alternate locations and shipping routes of oil have been coming online to the point where Iran’s ability to impact oil supplies, oil pricing, and thus the energy component of CPI is much reduced.
Prior to the start of the Iranian war, the high estimate of oil deliveries through the Strait of Hormuz stood at 20 million barrels per day. As recently as October 8th, deliveries recovered to 20.8 million barrels per day. Meanwhile, oil deliveries through Red Sea routes have more than doubled over the same time.
In Conclusion (Where to Bet a Steak Dinner)
Nothing on the horizon suggests that a recession is imminent. Is it possible? Of course; no commentator should ever suggest there is “no” probability of recession. But we believe there are more positive factors at play than negative ones. That gives us confidence to rank potential outcomes in the following order:
Whichever the eventual outcome, none of them suggest major changes should be considered, let alone implemented, to long-term investment strategies. That assumes, of course, that your investment strategy has included provisions for recession from time to time. That’s a standard part of our approach at First Financial Consulting, and should be with any true fiduciary advisor.
Practical tactical implications, in the event of some downturn, would focus on:
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