Augustine (Gus) Faucher is senior vice president and chief economist of The PNC Financial Services Group, serving as the principal spokesperson on all economic issues for PNC.
Prior to joining PNC as senior macroeconomist in December 2011, Faucher worked for 10 years at Moody’s Analytics (formerly Economy.com), where he was a director and senior economist. He was responsible for running the firm’s computer model of the U.S. economy, edited a monthly publication on the U.S. economic outlook, covered fiscal and monetary policy, and analyzed various regional economies. Previously, he worked for six years at the U.S. Treasury Department, and taught at the University of Illinois at Urbana-Champaign. He was named senior vice president in March 2015, deputy chief economist in February 2016, and to his current role in April 2017. Faucher is frequently cited in international, national, and regional media outlets including The Wall Street Journal and The New York Times. He has appeared on ABC World News, CBS Evening News, NBC Nightly News and Nightly Business Report, and is regularly featured on CNBC, CNN and Fox Business. In addition, he appears regularly on CBS Radio, NPR and Marketplace.
Transcript:
Hi, this is Gus Faucher, Chief Economist for the PNC Financial Services Group with an Economic Outlook for the fourth quarter of 2026.
The U.S. economy continues to expand strongly. Since right before the pandemic, the U.S. economy has grown by more than 16% after adjusting for inflation. This is much better compared to other peer economies in the U.S.'s leading the G7. And the U.S. labor market remains very strong. The economy lost about 22 million jobs with the pandemic, but since then, we have added back all of those jobs, plus about 8 million more.
Job growth slowed somewhat in 2025, but it has picked up again in 2026, with average job growth over the past few months of about 50,000. This is a good, solid number. The unemployment rate, which jumped up to almost 15% with the pandemic, fell very sharply, reaching a 50-year low of 3.4% in 2023.
It's moved up a little bit since then, but at 4.2% is comfortable, and that is consistent with the Federal Reserve's definition of maximum employment. However, we have seen higher interest rates in 2026. The Fed has started to raise the Fed funds rate, their key short-term policy rate, and that in turn has driven up yields on short-term government securities, as indicated by the blue line.
But long-term interest rates have also moved up in 2026 due to concerns about inflation, Federal Reserve monetary tightening, and now very large federal government budget deficits. The 10-year Treasury yield is above 5%, and the 30-year fixed rate mortgage is above 7%. This is making it more expensive for consumers and businesses to borrow, and this will weigh on economic growth in late 2026 and into 2027.
However, consumers continue to increase their spending strongly, and we received good news on consumers over the past few weeks. The blue line is growth in after-tax personal income. That is the income going to households from the labor market, from investment returns, and from government transfer payments, and this is adjusted for inflation.
The dotted line was reported personal income growth before revisions. The solid line is after revisions. You can see that with revisions, consumer income growth in 2025 and 2026 is much stronger than previously believed.
This means that consumers are in a better position to weather the current hits from higher energy prices that they are receiving. Consumer spending growth has been solid over the past few years, running at a pace between 2% and 3%. This is a little bit above income growth, but with revisions, the gap isn't quite as large, and that indicates that consumers can continue to increase their spending after adjusting for inflation going forward.
However, higher gasoline prices are a significant drag on consumers in late 2026. The price of a gallon of gasoline is up by about a dollar or so from before the U.S. hostilities with Iran started. This is costing consumers an extra $100 billion a year, the orange line on the right-hand scale, in spending on gasoline, and diesel prices have moved higher still.
This will be a drag on consumers' spending growth in late 2026, and households will also face higher home energy heating costs. However, consumers have weathered the storm so far, and with continued income gains in a solid labor market, consumer spending growth should continue to expand going forward. There is some better news on manufacturing in the U.S. economy in 2026.
The blue line on the left-hand scale is industrial production, that is, output of manufacturers, and after being flat from 2021 through 2025, it has started to pick up somewhat in 2026, with strong demand, especially for tech-related goods, also some reshoring that has taken place in the face of tariffs. Similarly, the Purchasing Manufacturers Index from the Institute for Supply Managers has been consistently above the 50 level that indicates expansion throughout 2026, and points to continued growth in manufacturing into 2027. However, the Federal Reserve remains concerned about inflation.
Inflation has been above the Federal Reserve's 2% objective since early 2021, and in fact has accelerated over the past year or so. The Fed is likely to raise the Fed funds rate, their key short-term policy rate, again at the end of 2026 and in early 2027, which would take it to a range between 4.25 and 4.5% by early spring of 2027. However, with continued strength in the economy from growth in consumer spending and very strong business investment related to tech, the U.S. economy should continue to expand going forward.
The outlook for economic growth in 2026 and 2027 remains solid. PNC expects somewhat slower economic growth over the next couple of years, but still solid at around 2%. And the unemployment rate, which was 4.2% in September, should remain just around that level through the rest of this year and throughout 2027.
Thank you very much for your time. You can see all of our materials at pnc.com slash economic reports and you can follow me on X - formerly Twitter at Gus Faucher PNC.
