‘Envy of the World’—U.S. Economy Expected to Keep Powering Higher

It has been two years since forecasters felt this good about the economic outlook.

In the latest quarterly survey by The Wall Street Journal, business and academic economists lowered the chances of a recession within the next year to 29% from 39% in the January survey . That was the lowest probability since April 2022, when the chances of a recession were set at 28%.

Economists, in fact, don’t think the economy will get even close to a recession. In January, they on average forecast sub-1% growth in each of the first three quarters of this year. Now, they expect growth to bottom out this year at an inflation-adjusted 1.4% in the third quarter.

Just 10% of survey respondents think the economy will experience at least one quarter of negative growth over the next 12 months, down from 33% in January.

The Wall Street Journal survey was conducted from April 5 to 9, just before the release of March consumer-price index data showing inflation running hotter than economists had anticipated.

The U.S. economy has far outperformed expectations over the past year and a half. Instead of stumbling under the weight of the Federal Reserve’s most aggressive interest-rate-raising campaign in four decades, it has continued expanding at a robust clip.

Few think that the economy can do quite as well as last year’s 3.1% growth, as measured by the seasonally adjusted fourth-quarter change from a year earlier. That figure might have been boosted by one-time factors such as federal infrastructure and semiconductor legislation and an uptick in immigration , which also might not last.

Still, economists have had to rethink forecasts for a major slowdown as more time has passed and one still doesn’t seem imminent. Economists on average think the economy grew at a 2.2% rate in the first three months of the year, up from a 0.9% forecast in January.

“The U.S. economy is performing very well,” EconForecaster economist James Smith said in the survey. “We’re truly the envy of the world.”

Much has changed since economists were last this optimistic. Two years ago, the Fed’s benchmark federal-funds rate was set between 0.25% and 0.5%. Inflation was high but economists still generally thought that it could come down without too much help from the Fed. They forecast steady growth and the midpoint of the range for the fed-funds rate topping out at just above 2.5%.

Now, the fed-funds rate is sitting between 5.25% and 5.5%, and economists don’t see a bunch of cuts coming soon. Many analysts trimmed their rate-cut forecasts after last week’s hot inflation report. But even before the report, survey respondents predicted that rates would end the year at 4.67%, implying three cuts. In January, their responses suggested that they thought four or five cuts were likely.

Economists now think the economy can withstand higher rates than they did not long ago.

They expect the 10-year Treasury yield—a key borrowing benchmark that was around 4.4% at the time of the survey—to end 2024 at 3.97%. Looking further into the future, they expect the yield to end 2026 at 3.78%. That is slightly above even their forecast last October, when the yield was higher than it is now.

Many economists have long thought that the economy can handle higher interest rates when it is capable of growing faster, and particularly when worker productivity has increased.

To that end, economists expect the Labor Department’s measure of productivity to rise at an annual rate of 1.9% over the next decade. That matches the annual increase in productivity over the last 40 years. But it is above the 1.2% pace of the 2010s, when the 10-year Treasury yield was typically stuck between 1.5% and 2.5%.

Some economists are now enthusiastic about the economy’s longer-term potential.

“We think that the American economy has entered a virtuous cycle where strong productivity results in growth above the long-term trend, inflation between 2% and 2.5% and an unemployment rate between 3.5% and 4%,” RSM US chief economist Joe Brusuelas said in the survey.

Many aren’t quite as optimistic. One downside of a better growth outlook is that a stronger economy could make it harder for inflation to fall all the way back to the Fed’s 2% target.

An inflation gauge that is closely watched by the Fed, the core personal-consumption expenditures price index, was 2.8% in February, its most recent reading. Economists now expect it to end the year at 2.5%, after having forecast 2.3% in January.

Economists, on average, believe that core PCE inflation will fall to 2.1% by the end of next year without a recession. However, their projections might already have ticked higher after last week’s price data, and some continue to worry that the Fed’s efforts to control inflation still present a major threat to the economy.

“The risks are clearly skewed toward more hawkish Fed outcomes, which could drag on our growth forecasts,” Deutsche Bank economists Brett Ryan and Matthew Luzzetti said in the survey.

The Wall Street Journal survey was answered by 69 economists. Not every economist responded to every question.

A sharp technology sell-off has exposed a new anxiety on global markets: whether the enormous borrowing behind the artificial-intelligence infrastructure boom can generate sufficient returns as interest rates rise and Chinese competition intensifies.

The artificial-intelligence investment boom has powered technology shares, semiconductor manufacturers and data-centre operators to extraordinary heights. Last week, investors were given a reminder that much of this expansion is being built with borrowed money.

The technology-heavy Nasdaq Composite fell 4.5 per cent over the week ended October 16, its weakest performance since late June. Semiconductor shares suffered an even deeper correction, with the Philadelphia Semiconductor Index losing about 11.4 per cent.

The selling spread quickly through global markets. Micron Technology fell 14.6 per cent over the week, while South Korea’s Samsung Electronics and SK Hynix dropped approximately 18 per cent and 24 per cent respectively.

This was more than a routine bout of profit-taking. Investors were reassessing three interconnected risks: higher interest rates, the rapidly expanding debt burden attached to AI infrastructure and the prospect of stronger competition from Chinese memory-chip manufacturers.

The debt behind the AI build-out

Artificial intelligence requires a physical infrastructure network of enormous scale. Data centres must be built, advanced processors purchased, power supplies secured and cooling systems installed before customers begin generating meaningful revenue from them.

Technology companies are increasingly supplementing their own cash with corporate bonds, syndicated loans, equipment leases, private credit and project-level financing.

JPMorgan describes the emerging funding model as a combination of conventional corporate borrowing and project finance tied to individual data-centre assets. In Australia, the Reserve Bank estimates that syndicated loans accounted for approximately three-quarters of data-centre financing during 2025 and 2026 to date.

The numbers are becoming large enough to affect broader credit markets. The Federal Reserve Bank of Dallas has cited Wall Street estimates suggesting AI-related investment-grade bond issuance could approach US$300 billion in 2026 alone.

That borrowing is not automatically problematic. Debt can be an efficient way to finance long-lived infrastructure when future revenue is sufficiently predictable. The concern is that AI technology, customer demand and computing economics are changing much faster than the repayment schedules attached to the assets.

A data centre financed today may carry debt for years. Investors must therefore make assumptions about future utilisation rates, electricity prices, chip performance, customer concentration and the amount businesses will ultimately pay for AI computing.

When interest rates rise, those assumptions become less forgiving.

Inflation changes the calculation

September’s US inflation data intensified the pressure. Consumer prices increased 3.7 per cent over the year, ahead of market expectations and up from 3.4 per cent in August.

The hotter reading reduced confidence that interest rates would fall quickly and pushed bond yields higher. That matters particularly for companies whose valuations depend on profits expected well into the future, as well as highly leveraged infrastructure operators that may need to refinance.

CoreWeave has emerged as a closely watched test case. The specialist cloud-computing company has accumulated substantial debt and lease obligations to build AI capacity, while relying on a concentrated group of large technology customers.

Its shares fell sharply during the sell-off, while the cost of insuring its debt against default climbed. CoreWeave has argued that its contracted backlog more than covers its obligations and that financial markets do not always understand its business model. Nevertheless, its securities have become a proxy for investor confidence in debt-funded AI infrastructure.

Oracle, another major investor in AI computing capacity, fell 8.8 per cent in Friday trading, while CoreWeave dropped 15.5 per cent.

The question is shifting from how much AI infrastructure can be built to how profitably it can be operated.

China adds another source of pressure

Interest rates were not the only catalyst. Reports of advances by Chinese memory-chip producer ChangXin Memory Technologies raised concerns that lower-cost Chinese products could increase competition across the global semiconductor industry.

Memory chips are essential to AI systems, but the industry is historically cyclical. Periods of tight supply and high pricing can encourage rapid investment, eventually producing oversupply and falling margins.

The prospect of a well-funded Chinese competitor expanding its technological capabilities unsettled investors in Samsung, SK Hynix and Micron. It also demonstrated that AI-related demand does not insulate chipmakers from conventional competitive pressures.

That combination—slower rate cuts, more expensive financing and potentially cheaper supply—challenged the assumption that every company exposed to AI would enjoy continually expanding margins.

A reset rather than the end of the boom

The sell-off does not establish that the AI boom is ending. Demand for computing power remains strong, the largest technology companies continue to generate formidable cash flows and many infrastructure projects are backed by long-term customer contracts.

What has changed is the market’s willingness to overlook the price and financing structure of that growth.

The most resilient companies are likely to be those able to fund investment from operating cash flow, secure long-duration customers and demonstrate that new capacity will earn returns comfortably above its financing costs.

More speculative operators may face greater scrutiny, particularly where debt is expensive, customers are concentrated or expected revenue depends on demand that has not yet materialised.

For Australian investors, the lesson extends beyond US technology shares. Local data-centre operators, infrastructure funds, electricity suppliers and property groups are increasingly exposed to the same investment cycle.

Artificial intelligence may remain one of the defining growth themes of the decade. But last week’s correction showed that enthusiasm for the technology does not eliminate financial discipline.

The next stage of the AI boom will be judged not only by computing power, model performance or demand for chips, but by something more traditional: whether the assets being financed can generate enough cash to repay the money borrowed to build them.

Fact box

Nasdaq Composite: Down 4.5 per cent for the week ended October 16, 2026

Philadelphia Semiconductor Index: Down approximately 11.4 per cent

Micron Technology: Down approximately 14.6 per cent

Samsung Electronics: Down approximately 18 per cent

SK Hynix: Down approximately 24 per cent

US September inflation: 3.7 per cent annually

Estimated 2026 AI-related investment-grade issuance: Approximately US$300 billion