Economist: 2027 Success Predicated on Protecting Margins and Preparing for More Inflation
Key Highlights
- The U.S. economy is expanding at a tepid pace, with growth expected to flatten further in 2027, amid divergent trends across industries and consumer segments.
- Inflation is projected to remain elevated into 2027, driven by geopolitical shocks, stimulus effects and sector-specific costs, before easing slightly in 2028.
- Wage pressures and a tight labor market will persist, with successful firms focusing on retention strategies and flexible work arrangements to maintain competitiveness.
- Data center and high-tech investments continue to grow, but their expansion may slow, offering opportunities in related sectors like energy and infrastructure.
- Management must adopt flexible strategies, including diversified offerings and cost controls, to navigate profitless prosperity and sustain margins in an uncertain environment.
What to make of conflicting economic growth data in July 2026? Just how strong or weak is the famed “consumer?” And how to frame the broader picture around inflation for 2027 and beyond?
Those are just some of the big questions facing management teams as they get down to the brass tacks of planning for next year. The economy appears to have taken in stride the energy shock from the Iran war (although some in the energy sector think some ugly spillover effects still need to work their way through the system) and several real-time tracker of growth indicators think the third quarter should produce growth of about 2% or more.
But those seemingly placid high-level data points hide many things twisting and turning under the surface. Last November, ExecutiveEDGE talked with Lauren Saidel-Baker, an economist and senior consulting speaker at ITR Economics, about the most important things business leaders should keep in mind as they approached 2026. Eight months later, we thought it was a good time to check back as the 2027 planning cycle starts to gather momentum.
De Lombaerde: Halfway through 2026, what about the U.S. economy has you feeling upbeat and what has you concerned?
Saidel-Baker: The good news: The economy is expanding. We are not in a recession, nor does ITR expect a recession on the horizon. The less good news: The pace of growth is tepid at best and will flatten further in 2027. Some industries will enter outright decline next year. Lingering uncertainty is resulting in divergent trends: both across consumer outcomes (see the K-shaped economy) as well as in B2B markets where tech is driving aggregate growth but legacy manufacturing is struggling under elevated interest rates, investment hesitancy and high prices.
The U.S. consumer — who drives two-thirds of GDP — remains stable, but cracks are forming. We are closely monitoring real income levels; that is, inflation-adjusted income. U.S. real wages and salaries (which are adjusted for inflation) are down 0.9% over an eight-month period from the September 2025 record high to May 2026 and are essentially flat compared with one year ago. This represents a loss of purchasing power.
Opportunities still exist in certain demographics, but vary widely depending on specific consumer profiles. Middle-to-upper income consumers have more breathing room, while lower-income consumers are feeling the squeeze of higher prices. The stagnant real wage trend is also less concerning for the highest earners who derive more income from investments rather than just wages.
We are also seeing green shoots from lenders, suggesting that some consumers will see easier access to credit. However, the inflation-adjusted personal savings balance is tentatively dropping, despite total asset levels remaining around record highs. Aside from auto loans, delinquency rates are not concerning.
Despite sagging consumer confidence, overall retail spending is due to rise in the near term as higher pricing supports dollar-denominated total spending and as most consumers are allocating their budgets differently but not yet foregoing most purchases. In many cases, the end result is a “trade down” which will benefit certain businesses/brands at the expense of other (more expensive) options.
De Lombaerde: On a similar note: What’s the most common question or need/pain point you’re hearing from clients?
Saidel-Baker: Without a doubt: margin pressure. The compounding pressures of inflation fatigue and more pronounced income inequality are making it more difficult to pass along price increases, while costs are rising nearly across the board. Many businesses are reporting that headline inflation numbers feel “out of touch” with their actual cost pressures. Businesses with significant exposure to commodities, particularly petroleum products and metals, are experiencing a much higher jump in input costs.
Additionally, the high-tech boom is pushing up computer and electronic equipment prices. The challenge for businesses remains: In response to higher input costs, how quickly should prices change and by how much? Different firms and industries will choose diverging paths depending on their market discovery — whether their pricing path includes fewer, larger price changes or a more gradual pace of price hikes. The resulting trade-off between margin and market share has the potential to separate the winners from the losers in coming years.
De Lombaerde: Late last year, you were emphatic: “Inflation will be building, not continuing downward.” It’s more than fair to consider that a correct call. Do you see price pressures lasting into 2027?
Saidel-Baker: Thank you! Yes, elevated inflation is here to stay for the remainder of the decade. We anticipate rising inflation into 2027, followed by some disinflation that year, before accelerating pricing pressures return into 2028.
While inflation will be elevated, the cycle will not be as severe as the early 2020s for a myriad of reasons. Geopolitically driven supply shocks must be monitored but are not approaching the degree of widespread Covid-era shutdowns. Stimulus-driven inflation is also a factor, both in direct stimulus from accelerating government transfer payments as well as monetary stimulus from an expanding money supply.
More sector-specific inflation includes rising costs for industries in which outsized growth poses competition for resources — such as the massive data center buildout and a likely coming surge in defense spending — but is nowhere near the “golden screw” problem of the early 2020s. Wage pressures will persist for the medium term as workers demand cost-of-living increases and the supply of workers remains tight due to an aging population and low immigration levels. Businesses must be ready for these higher costs.
De Lombaerde: Regarding wage pressures and the job market more broadly: Has the situation changed materially since November? And what are clients having success in this market doing better than others?
Saidel-Baker: The labor market has loosened slightly, but demographic trends will keep it generally tight through the medium term. As hiring decisions are reactionary, the pessimism and uncertainty of 2025 muted employment growth through the first half of 2026. The rate of private layoffs and discharges, at 1.3%, is a touch above the five-year average but well below the 2009 and 2020 peaks (2.5% and 6.5% respectively).
This indicates that while layoffs often make the news, they are occurring at a typical rate and do not indicate abnormal stress. Rising industrial demand and stability in U.S. retail sales generally bodes well for employment. The current job market stalemate of "low-hire, low-fire" is likely to transition to a more "moderate-hire, low-fire" mode later this year and into mid-2027.
Wage pressures will persist for the medium term as workers demand cost-of-living increases and the supply of workers remains tight due to an aging population and low immigration levels. Businesses must be ready for these higher costs.
However, there is a risk that lingering uncertainty due to the war in Iran and AI adoption trends could delay the turning point in the labor market. General tightness in the labor market will exert upside pressure on wages. Successful firms are prioritizing retention of top workers and rewarding employees with the things that those workers most highly value. In some cases, flexible work arrangements, mission-oriented objectives or team culture matter more than salaries.
De Lombaerde: You just mentioned the data center/high-tech boom as another source of inflation. It also appears to be crowding out some other investments. How are you talking to clients about this part of the economy and its longer-term potential? Is this a construction wave that recedes in two years or is there more to it?
Saidel-Baker: If data center construction is a bubble, it isn’t one that we expect to pop in soon. Some firms will be able to find new opportunities in related segments. For example, even if you can’t play directly in the data center space, you still may be able to benefit from the electricity generation and distribution needs of these facilities.
Our view is for the pace of growth to continue slowing, but opportunities in the data center, computers and electronic segment will persist for the medium term. In the past 12 months, private data center construction reached $54 billion, compared to $77.2 billion in spending on private computer, electronic and electrical construction.
However, despite their higher recent growth rates, both categories are smaller than other private manufacturing construction (excluding computer, electronic and electrical), which totaled $115.8 billion. That is to say, legacy manufacturing construction remains a sizeable opportunity — albeit one that is not rapidly expanding.
De Lombaerde: Leadership teams needed to travel another bumpy path this spring because of the effects of the Iran war. You and the ITR team have emphasized the need to remain flexible through the upheavals of recent years; what are the most important ways you think C-suites can do that in coming quarters?
Saidel-Baker: Here at ITR, we have a term: “profitless prosperity.” This is the challenge that businesses will face through the end of this decade, in which top-line sales will be relatively deceptive. In an inflationary environment, it will be somewhat easy to grow top-line sales or revenue. If business leaders are laser-focused on this metric alone, they risk compressing margins, taking a bite out of underlying profitability.
All firms should be scrutinizing their market-specific leading indicators and understanding the nuances of individual customer segments. Our top suggestions include:
- Adjusting product and service offerings to align with client needs. For many, this will entail offering budget options, or a “good, better, best” model and marketing affordability. For others, it may mean breaking into a premium tier where customers have more discretionary funds.
- Protect pricing power and margins through both controlling costs and improving competitive positioning.
- Build up cash reserves to be better able to seize unique opportunities that arise during times of economic uncertainty.
Target opportunity, but not at the expense of diversification. Trendy markets like data centers, AI and tech will provide outsized opportunities, but more recession-resilient sectors face less risk of correction.
About the Author
Geert De Lombaerde
Contributor
A native of Belgium, Geert De Lombaerde joined EndeavorB2B in September 2021 to cover public companies, markets, and economic trends primarily for IndustryWeek, FleetOwner, Oil & Gas Journal, T&D World, and Healthcare Innovation. His work focuses on strategy, leadership, capital spending, and mergers and acquisitions, and he also works with Endeavor Business Intelligence on surveys and data projects.
Geert has been in business journalism since the mid-1990s. With a degree in journalism from the University of Missouri, he began his reporting career at the Business Courier in Cincinnati, initially covering retail and the courts before shifting to banking, insurance, and investing. He later was managing editor and editor of the Nashville Business Journal before being named editor of the Nashville Post in 2008. He led a team that helped grow the Post's online traffic by an average of more than 15% annually before joining Endeavor.
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