International and Monetary Economics Network

Chart of the week: The labor share in the United States continues to drop.

While there are certain measurement issues and special effects that seem to overstate the decline, there is solid evidence for a considerable decrease in the labor share in the United States.

Our current U.S. Economic Outlook

Current nowcasts for U.S. growth in Q2

Our current nowcasts for U.S. inflation

Our current nowcasts for the U.S. labor market

The expectations of our network regarding the Fed’s monetary policy decisions on June 17

In case you missed our U.S. Economy Flash of May 2026, we are reposting it below:

U.S. Economy Flash May 2026

• The U.S. economy stayed resilient at the beginning of the year, but signs of slower economic growth and persistently high inflation could be clearly observed in January and February. The outbreak of the war in the Middle East significantly increased inflation and uncertainty regarding the future path of economic output and inflation.
• We have considerably raised our baseline assumptions for the path of oil and natural gas prices. In addition, supply chains for a number of other products, such as fertilizers, remain disrupted, adding to inflationary pressures and possibly causing food shortages. As a result, inflationary pressures on agricultural goods are anticipated. Other affected products include helium, which is essential in semiconductor manufacturing.
• In our baseline, we expect Brent spot prices to only slightly ease to $95 per barrel by the end of June. In this scenario, the pre-crisis price level will not be reached before 2028. This will have considerable negative effects on the U.S. economy, but it will not cause dramatic economic disruptions. Weaker aggregate demand will exert modest downward pressure on oil prices.
• GDP growth in the first quarter of 2026 was 1.6 percent on an annualized basis. Our IMEN nowcast had indicated a growth rate of 1.7 percent and came closer to the final reading than other nowcasts. Private consumption and investment expanded solidly in the first quarter of 2026. After the government shutdown in October and November 2025, there was a rebound in government spending. However, residential investment contracted again and imports grew faster than exports.
• Overall, the U.S. economy still benefits from the AI boom, but the rest of the economy is less robust. While we expect this tech-driven expansion to last and continue to be associated with sustained infrastructure investments, it risks operating as an isolated growth driver rather than a broad economic catalyst for strong productivity growth. U.S. households benefit from an expansionary fiscal policy and past interest rate cuts. However, the labor market has weakened. Inflation is too high and will likely continue to rise, at least in the short term. Apart from higher energy prices, the ongoing effects of higher tariffs still lead to inflationary pressures.
• We currently expect U.S. GDP growth to be 1.8 percent (annualized) in the second quarter of 2026. Our IMEN nowcast currently points to a somewhat higher growth rate (mostly based on data from May), modestly above two percent, but we expect a somewhat weaker development in May and June.
• Instead of the interest rate cuts that were expected at the beginning of 2026, we now expect two interest rate increases in 2026, beginning in July. Currently, we do not expect an interest rate increase in June, in accordance with recent polls within the IMEN community. Inflation has been elevated for several years, which could structurally raise inflation expectations. In addition, the transition from Powell to Warsh is accompanied by increased uncertainty, and there are concerns about the independence of the Fed.
• Trade policy remains hard to predict. After the Supreme Court of the United States (SCOTUS) ruled that President Trump exceeded his authority in invoking the 1977 International Emergency Economic Powers Act (IEEPA) to impose reciprocal tariffs, the President imposed a flat 10% tariff on all imports under Section 122 of the Trade Act of 1974, a time-limited authority that allows duties for up to 150 days.
• The subdued economic momentum is also reflected in the labor market. Net job growth has been modest in recent months. In the last three months, only 144,000 new jobs were created in total. Most gains came from the healthcare and social services sectors. This concentration further clouds the overall picture, although it may reflect a structural trend in which these sectors continue to add jobs. Unemployment is still low (at 4.3%), but labor force participation appears to be on a downward trend. As expected, there were significant downward revisions to job growth in 2025, though they were less dramatic than feared. According to the revised data, hardly any new jobs were created last year. Overall, the U.S. labor market remains subdued but better than feared.
• At the same time, population growth has slowed due to new immigration policies and an aging society. The breakeven rate of monthly payroll growth needed to keep up with labor force growth has fallen considerably—from around 150,000 jobs in 2024 to zero or even slightly negative numbers. This constitutes a significant structural shift. In addition, lower population growth rates will be associated with lower potential GDP growth rates. The comparison of per capita GDP growth rates might become somewhat more relevant.
• Uncertainty regarding the future situation in the Middle East remains high. The same applies to the future evolution of tariffs and other trade policies. The Trump administration appears to be using tariffs and tariff threats as a geopolitical tool to achieve objectives beyond purely economic ones. This makes it more difficult to predict future tariff policies.
• We anticipate slower economic growth and considerably elevated inflation in the coming months. In our baseline scenario, the economy will grow slowly but will not enter a recession. We expect inflation to remain above the central bank’s two‑percent target in 2026 and the first half of 2027. Unsurprisingly, inflation – as measured by the Consumer Price Index (CPI) – picked up significantly in March. The escalation in the Middle East had the expected effect on energy prices. Compared to February, the CPI rose by 0.9 percent in March. In April, it rose by another 0.6 percent. Year-on-year, inflation stood at 3.8 percent. As expected, core inflation has been less affected by events in the Middle East so far, coming in at 2.8 percent compared to the same month last year. However, it shows that inflationary pressures are too high even without the war and high energy prices. After 2022 and 2023, the United States has an inflation problem again.
• Overall, at IMEN, we maintain that the U.S. economy will expand at solid rates but remains somewhat more fragile than often assumed. Average annual GDP growth will be moderate in 2026 and 2027, at 1.8 and 2.1 percent, respectively. Lower population growth dampens GDP growth. We expect slightly lower growth rates in 2026 than other forecasters. The U.S. economy will become somewhat more dynamic in 2027. The unemployment rate will moderately increase in the coming months. At IMEN, we believe that inflation will remain considerably elevated in 2026. We anticipate that inflation will approach the 2‑percent target in the second half of 2027.