Understanding the Current Economic Landscape

The macroeconomic environment in 2025-2026 presents a complex interplay of forces that require careful analysis and sophisticated forecasting techniques.

Inflation Dynamics

Core PCE inflation, the Federal Reserve's preferred measure, has shown remarkable resilience. Our AUTO-ARIMAX models indicate a gradual moderation trend, with forecasts suggesting continued stability around the 2% target over the medium term.

The exclusion of volatile food and energy prices from core measures provides a clearer signal of underlying inflationary pressures, which remain influenced by:

Persistent services sector price growth
Wage-price dynamics in tight labor markets
Supply chain normalization effects

Labor Market Strength

Nonfarm payroll data continues to demonstrate the resilience of the U.S. labor market. Our models incorporate leading indicators such as initial jobless claims and job openings to provide forward-looking employment forecasts.

Key observations:

Sustained employment growth despite monetary tightening
Sectoral shifts favoring professional services and healthcare
Gradual normalization of labor force participation rates

Interest Rate Outlook

The yield curve, particularly the 10Y-2Y spread, remains a critical indicator for economic cycle positioning. Our forecasts suggest:

Short-term rates (2-year Treasury): Sensitive to Federal Reserve policy signals, with expectations of gradual easing as inflation moderates
Long-term rates (10-year Treasury): Reflecting structural factors including fiscal dynamics and term premium adjustments
Yield curve dynamics: Normalization from inverted positions signals reduced recession risk

Methodological Approach

Our forecasts leverage AUTO-ARIMAX models that automatically select optimal parameters while incorporating relevant exogenous variables. This approach provides:

Robust out-of-sample performance
Transparent model diagnostics
Confidence intervals reflecting forecast uncertainty

Conclusion