U.S. Economic and Property Market Outlook: Growth is Fundamental

Michael Acton, CFA® - Head of Research & Strategy, North America

The U.S. economy continues to expand at a moderate pace despite geopolitical uncertainty, trade friction, and renewed inflation pressure. The key story remains the AI-led investment cycle, which is now an important driver of business spending and broader economic activity.

Summary

• Growth remains positive, but uneven. Real GDP grew at a 1.5% annualized rate in Q2, supported by solid consumption and continued AI-related capital spending, even as trade and inventory effects weighed on headline growth.

• Labor availability is becoming the bigger constraint. Job growth has reaccelerated modestly in 2026, but labor force growth has turned negative in five of the past six months and participation has fallen from 62.8% at year-end 2023 to 61.5% in June.

• Inflation and rates remain the main macro headwinds. Inflation has reaccelerated with energy shocks tied to the Iran conflict, real yields have moved higher, and the 30-year Treasury yield ended July at its highest level in twenty years.

• Commercial real estate fundamentals remain generally resilient. NPI total returns have been positive for eight consecutive quarters, driven primarily by income rather than appreciation, while most sectors are still expected to generate moderate positive NOI growth over the next three to five years.

• In this environment, fundamentals matter more. With rates likely to stay higher for longer, income growth, capital discipline, sector selection, and market-level differentiation should matter more than cap rate compression or financial engineering.

Despite significant headwinds from the on-again, off-again war with Iran, heightened energy market volatility, and renewed trade uncertainty, the U.S. economy continues to expand. Real GDP grew at a 1.5% annualized rate during the second quarter, supported by 3.2% real consumption growth and offset by drags from trade and inventories. The underlying engine of growth remains the outsized AI-driven capex boom at the center of the current late-cycle expansion. This investment continues to increase at an annual rate of nearly 20%, even as investors increasingly question the durability of the cycle.

 

FIGURE 1: GROWTH IN INFORMATION PROCESSING EQUIPMENT INVESTMENT AND NOMINAL GDP

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Source: Bureau of Economic Analysis (BEA)
 

U.S. job growth, which had been slowing for several years, likely bottomed at the end of 2025 with near-zero year-over-year growth and has reaccelerated, albeit moderately, over the first six months of this year.
 

FIGURE 2: U.S. MONTHLY EMPLOYMENT GROWTH

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Source: Bureau of Labor Statistics (BLS), as of June 2026
 

Regardless of employer demand for labor, the greatest constraint on near-term employment growth will likely be labor availability. So far in 2026, the U.S. labor force has recorded negative year-over-year growth in five of the past six months, a phenomenon typically observed only during severe economic events such as the global financial crisis (GFC) or the COVID-19 pandemic.

 

FIGURE 3: U.S. MONTHLY LABOR FORCE GROWTH (YEAR-OVER-YEAR CHANGE)

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Source: Bureau of Labor Statistics (BLS)
 

Labor force growth, or contraction, is shaped by two factors: changes in the working-age population, typically defined as ages 15 to 64, and the degree to which working-age people choose to participate in the workforce. Current projections from the Census Bureau show little or no growth in the working-age population over this decade as the tail end of the Baby Boom, people currently age 62 to 80, fully exits the labor force over the next several years while the smaller Gen Alpha cohort, people currently under age 16, enters the working-age group. Recent changes to U.S. immigration policy and enforcement likely increase the downside risk to current working-age population growth projections, particularly with respect to foreign-born workers.

More significantly, U.S. labor force participation rates, while recovered somewhat from the pandemic period, have been falling steadily since the beginning of the century. After reaching a post-pandemic high of 62.8% at the end of 2023, the overall U.S. labor force participation rate declined to 61.5% in June, with the pace of decline accelerating since the beginning of 2025.
 

FIGURE 4: U.S. LABOR FORCE PARTICIPATION RATE

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Source: Bureau of Labor Statistics (BLS), as of June 2026
 

Left unchanged, current labor force trends are likely to contribute negatively to the larger issue of continued higher inflation. U.S. inflation surged during and immediately after the COVID period, in part reflecting a broad timing mismatch between demand and supply across the economy. In response to fears of collapsing final demand, the U.S. government flooded the economy with direct transfer payments to stimulate consumer and business spending, but increased supply, or production, lagged. The more significant inflationary impact during this period, however, came directly from growth in the money supply as the Federal Reserve monetized government borrowing to facilitate these payments. Between the end of 2019 and the end of 2022, the total U.S. money supply increased approximately 40%, roughly twice the increase in nominal GDP over this period.

 

FIGURE 5: U.S. MONEY SUPPLY GROWTH AND INFLATION

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Sources: Federal Reserve, Bureau of Labor Statistics (BLS), as of June 2026
 

While overall inflation has retreated from post-pandemic highs, it has reaccelerated in recent months in response to energy supply shocks related to the war with Iran. Initially, markets viewed this as a temporary phenomenon, likely to fade as the expected “brief” war concluded. As the war enters its sixth month, markets continue to reassess the temporary nature of the conflict and its impacts on energy prices and broader inflation. To this point, since the day before the war began, February 27, U.S. real yields have moved steadily higher, increasing by roughly 70 basis points and accelerating since mid-May.
 

FIGURE 6: INFLATION-INDEXED 10-YEAR YIELD

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Source: Treasury.gov
 

Currently, we do not anticipate a near-term interest rate reduction by the Federal Reserve or any meaningful decline in longer rates. To this point, the yield on the 30-year U.S. Treasury bond finished July at the highest level in twenty years, rising above the high watermark of the post-pandemic inflation spike.  
 

FIGURE 7: 30 YEAR TREASURY BOND YIELD

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Source: Treasury.gov, as of June 2026
 

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For more information, please contact:
MICHAEL ACTON, CFA®

Managing Director, Head of Research & Strategy, North America

michael.acton@aew.com

+1.617.261.9577

JAY STRUZZIERY, CFA®
Head of Investor Relations
jay.struzziery@aew.com
+1.617.261.9326

This material is intended for information purposes only and does not constitute investment advice or a recommendation. The information and opinions contained in the material have been compiled or arrived at based upon information obtained from sources believed to be reliable, but we do not guarantee its accuracy, completeness or fairness. Opinions expressed reflect prevailing market conditions and are subject to change. Neither this material, nor any of its contents, may be used for any purpose without the consent and knowledge of AEW. There is no assurance that any prediction, projection or forecast will be realized.