This is the key question for the U.S. economy in 2026

Investing.com -- Morgan Stanley believes the central issue for the U.S. economy this year is whether trade flows will keep distorting quarterly growth readings or whether the turbulence seen after “Liberation Day” has passed.

Analyst Michael Gapen wrote in a note to clients on Friday that a “key question for the US economy in 2026 is whether trade flows will be a driver of volatility in real GDP estimates, or whether the shock to trade volumes following ‘Liberation Day’ has run its course.”

According to the bank, trade swings were a defining feature of 2025.

“Net trade subtracted 4.7pp from real GDP growth in 1Q 25, added 4.8pp in 2Q, and added another 1.6pp in 3Q,” wrote Gapen. “ We estimate it added 0.1pp in 4Q based on our tracking estimate leading into the BEA's first estimate of 4Q 25 US GDP.”

Gapen argued that if volatility continues, GDP will remain a “noisy signal.” But he added: “Our view is the volatility is largely behind us and GDP should send a clearer signal in 2026.”

Morgan Stanley believes some components of imports require closer inspection. The bank mentioned that computer imports “remain robust on account of AI spending,” while pharmaceuticals surged in early 2025 due to fears of tariffs “that did not materialize.”

Gapen highlighted that nonmonetary gold flows also distorted headline import figures but are not included in GDP.

Excluding those special factors, Morgan Stanley said the retracement from frontloading is over and that import volumes “may indeed be slowing” in response to protectionism. Overall, the bank concluded that trade should be a “smaller determinant of growth in real GDP in 2026 than in 2025.”

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