SF FedViews: Prospects for AI-Related Activity Add to Uncertainty Around the Economic Outlook in 2026

Why It Matters

The surge in AI activity is reshaping productivity and could drive future GDP growth, while persistent inflation and a modestly restrictive monetary stance keep policy adjustments on the agenda.

Key Takeaways

• AI job postings rose to 6.5% in knowledge sectors.
• Knowledge‑intensive industries drove 50% of Q3 2025 growth.
• Real GDP Q4 2025 slowed to 1.4% annualized.
• Inflation remains above 2% despite tariff easing.
• Fed likely eases rates toward neutral in 2026.

Pulse Analysis

The Federal Reserve Bank of San Francisco’s latest outlook highlights the outsized role that artificial‑intelligence‑related activity played in the 2025 expansion. Lightcast data show AI‑focused job postings climbing to 6.5 % of hires within knowledge‑intensive sectors—information, advanced manufacturing, finance, and professional services—far outpacing the 1.2 % average in other industries. Those sectors, which together account for just over a quarter of total output, were responsible for roughly 50 % of real GDP growth in the third quarter. Analysts see this concentration as a catalyst for productivity gains, but also as a source of volatility if AI adoption stalls.

At the same time, inflationary pressures remain stubborn. The headline PCE price index held at 2.9 % year‑over‑year, while core PCE stayed at 3.0 %, reflecting lingering “supercore” service costs and the residual impact of new tariffs imposed in 2025. Although tariff pass‑through is expected to diminish as supply chains adjust, the Supreme Court’s recent ruling on tariff authority adds legal uncertainty. Consequently, the Fed’s February policy decision left the federal funds rate at 3.5‑3.75 %, signalling a cautiously restrictive stance pending clearer data.

Looking ahead, the San Francisco Fed projects above‑trend growth in the first half of 2026, driven by a rebound from the government‑shutdown‑induced slowdown. Market participants anticipate further rate cuts toward the neutral 3 % level, which could ease financing conditions for AI‑heavy firms and support continued hiring. However, downside risks persist: a slowdown in AI‑related investment, renewed tariff escalations, or an unexpected inflation resurgence could prompt a more hawkish response. Stakeholders should monitor AI labor market trends and inflation components as key barometers of the economy’s trajectory.