Bank of America's Aditya Bhave shares his 2026 economic outlook

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Joining me now is Aditya Bhave, senior US economist at Bank of America. Aditya, welcome. So, what happens to concerns about a K-shaped economy in 2026 and this theme of affordability in the political discourse?

Aditya Bhave (Senior U.S. Economist) 00:14.440

Thank you. Good evening. So, let's start by talking about our forecast for next year. As you noted, we're quite optimistic. Five tailwinds, what are they? First, fiscal policy. We think the stimulus from the big beautiful bill for CapEx, for consumers adds three to 4/10th GDP

Aditya Bhave (Senior U.S. Economist) 00:31.400

growth next year. Second, the lag defect of Fed cuts, so that's monetary stimulus. Third, we think the AI related tailwind should continue next year. Fourth, we think trade policy is going to be more supportive for growth next year than this year. And that's true regardless of

Aditya Bhave (Senior U.S. Economist) 00:49.040

what happens with the IEA tariffs in the Supreme Court. And then fifth, the base effects from the shutdown should also be helpful for growth next year. So what happens to the case-based economy, our base case is is that the lower part of the case, a lower income spending

Aditya Bhave (Senior U.S. Economist) 01:03.840

stabilizers supported by upper income spending which should eventually put a floor under the job market.

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So, is it still okay?

Aditya Bhave (Senior U.S. Economist) 01:13.080

It's okay, but it's not the kind of K that one would be really worried about. So, there's different types of K is, right? What's the most worrying type of K? The most worrying K is one in which upper income spending is just about holding on and lower income spending is outright

Aditya Bhave (Senior U.S. Economist) 01:26.560

weak. What we're seeing in our card data by contrast is that lower lower income spending is holding on, whereas higher income spending is outright strong. So it is a K, but it's not the most worrying kind of K, and we think that eventually if this continues higher income folks,

Aditya Bhave (Senior U.S. Economist) 01:40.840

they tend to spend more on services, and that should mean that eventually this is a very blue color service-driven economy, and eventually that should help stabilize the labor market, as I mentioned earlier. Yeah,

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it sounds like so much does depend on the labor market. How much does the labor market depend on interest rates continuing to come down and not just hold steady.

Aditya Bhave (Senior U.S. Economist) 02:01.840

It helps. So the cuts that the Fed have done help a certain degree. The other thing that we find quite encouraging is there's obviously this chicken and egg relationship between the labor market and the consumer over extended periods of time. But what we found is that it's

Aditya Bhave (Senior U.S. Economist) 02:17.880

typically consumer spending that leads jobs rather than vice versa. So the stability, I would say, perhaps more than stability, resilience in consumer spending that we've seen over the last few months, I think bodes quite well for for the labor market going forward. Now again,

Aditya Bhave (Senior U.S. Economist) 02:32.280

we're not talking about a significant acceleration, but we're talking about a world in which the unemployment rate stabilizes around where it is now and then eventually starts dropping in the back half of next year.

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Is consumer sentiment going to shift and does it have to?

Aditya Bhave (Senior U.S. Economist) 02:46.720

It doesn't have to. I don't know if it's going to shift. It's difficult to predict how people feel. Obviously, sentiment has been disconnected from consumer spending for the last four years, which is why I'm saying it doesn't really have to shift. We've had an extended period of

Aditya Bhave (Senior U.S. Economist) 03:02.240

weak consumer spending with sorry strong consumer spending with weak consumer sentiment. So that could continue for a while. There's other reasons for consumer weak consumer sentiment likely related to the cumulative increase in prices of price levels rather than just inflation

Aditya Bhave (Senior U.S. Economist) 03:19.640

over the last year and also political polarization might be making things worse.

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Speaking of which, we got midterms. How does that enter into your picture and all the talk about affordability?

Aditya Bhave (Senior U.S. Economist) 03:31.600

It's obviously a big point of focus. We think that the incentives for the midterms probably lean this administration towards being more favorable for growth on trade policy over the next year, which is why I said, "Look, if the tariffs don't get overturned, then we think the

Aditya Bhave (Senior U.S. Economist) 03:50.840

administration will move very quickly towards delivering good news on trade. Perhaps a deal with China to bring down the fentanyl tariffs, perhaps a renewal of the US MCA, but we think the administration will certainly be focused on delivering good news for the stock market and

Aditya Bhave (Senior U.S. Economist) 04:06.840

for the economy on trade policy.