US Economy Stays Resilient Despite Middle East Conflict and Elevated Inflation

US sectoral data continue to indicate a resilient economy even as conflict in the Middle East persists, according to ICIS. In September, output rose across 66% of the 155 sectors monitored, the widest share in three and a half years, pointing to broad-based growth.

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Transportation, utilities, information and communications led the expansion, followed by the goods sectors, while finance, insurance and real estate along with services also posted solid gains. High-frequency indicators suggest overall business activity momentum carried into October.

Employment increased across half of the sectors, offering further evidence that supply-side activity is holding up across much of the economy despite a challenging backdrop. Households have not yet reported a material squeeze in overall affordability, but businesses are growing more concerned about energy costs as the Middle East conflict continues.

Demand and Investment

Consumer spending remains resilient and business spending is expanding rapidly, supported by investment in AI. The effect of rising energy prices has yet to fully materialize, though risks are building.

Real GDP growth is projected at 2.3% in 2026, matching 2025, with improvement to 2.4% expected in 2027 and 2028. Inflation remains elevated because of the Middle East conflicts’ energy effects and tariffs, but recent upward pressure from both sources is fading. Economists expect inflation to average 3.3% this year, up from 2.7% in 2025 but below 4.1% in 2023 and 8.0% in 2022. That remains above the Federal Reserve’s 2.0% target, and together with large US fiscal deficits, surging energy prices, strong growth and credit demand, interest rates such as the key 10-year Treasury yield sit above levels seen in the 2010s. Rates are expected to stay elevated with some relief in late 2027 and in 2028, while housing and other interest-sensitive sectors face challenges in the meantime.

Survey Signals

The September ISM US Manufacturing Purchasing Managers Index posted a solid 54.5 reading, the ninth consecutive month of expansion above 50. Production, new orders and order backlogs were all positive, and gains were widespread, with 12 of 18 industries expanding. The ISM US Services PMI eased to a still solid 54.9 in September, the 27th month in expansionary territory. Business activity in non-manufacturing recorded another good reading, and both surveys indicate a resilient, expanding economy.

Housing Under Pressure

Housing continues to face affordability challenges from elevated home values and 30-year fixed mortgage rates around 7.5%, which are up from earlier in the year, while builder confidence remains exceptionally low. September housing starts slowed to a 1.22 million unit pace, down 7.4% year on year. Total US housing starts are expected to edge down to 1.34 million in 2026 before improving to 1.37 million in 2027, both well below the 1.60 million starts in 2021 and short of what is needed to address a housing shortage. Affordability is the defining issue, and mortgage rates would need to fall well under 6.0% for any sizeable rebound. Demographic factors should provide some support over the next decade, as new construction has failed to keep pace with household formations over the past two decades.

Autos and Retail

US light vehicle sales were robust in the second quarter, aided by tax returns and EV sales, but the third quarter brought a retreat as inflation eroded consumer incomes and high vehicle values and auto loan rates reduced new vehicle affordability. With a largely balanced labor market, light vehicle sales are expected at 16.2 million this year before improving to 17.3 million in 2027, bringing activity back near the 2018 peak, with 2028 potentially near that past peak. North America represents a 6.86 billion pound market for plastic resins.

The latest retail sales report showed further improvement, and despite depressed consumer confidence, overall consumer spending is holding up, supported by household balance sheets, especially among affluent consumers, and by modest debt burdens. Spending remains exposed to labor market trends, and the outlook is positive but with limited upside.

Fixed business investment has taken over from consumer spending as the driver of growth, with expectations improving further in recent months. New orders for capital goods remain positive, supported by AI and related investment. Business investment also appears to be broadening as delayed productivity projects and reshoring initiatives move forward, many carrying sizeable chemistry content that could support demand growth.

Manufacturing PMIs for major US export markets in the Americas were mixed, with Canada and Mexico positive and Brazil slightly negative. European factory activity remained expansionary in September, as did activity in China, Japan, South Korea and other major Asian exporting nations, with the buildout of AI infrastructure very supportive of growth in the latter markets.

Source: IndexBox Market Intelligence Platform  

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