As 2025 winds down, what we might see in 2026 is coming into focus—although still clouded by the aftereffects of the economic data embargo during the government shutdown. We anticipate economic growth to rise modestly, though inflationary pressures and tariff uncertainty continue to cast a shadow over the outlook.
We expect an uptick in gross domestic product (GDP) from 1.8% in 2025 to 2.2% in 2026 driven by four factors:
- Stimulus for consumers and businesses from tax incentives in the One Big Beautiful Bill (OBBB).
- More Federal Reserve (Fed) easing translating into marginally lower borrowing costs.
- Steadier trade policy and tariffs, including ratcheting down rhetoric with China, Canada, and Mexico – our three largest trading partners.
- Ongoing technology & AI spending remain a strong tailwind for economic growth.
The catchup in economic data – backlogged because of the government shutdown – will tell us more in the coming months. Yet, that data flow will come in uneven bursts over the next few weeks, which means we won't get a clean read on the economy until early 2026.
As to other economic fundamentals that the Fed watches closely, inflation likely heads higher in the near term as tariffs continue to creep into imported goods prices, but we don’t expect a reprise of 2021 and 2022. The unemployment rate continues to drift slowly higher, but not in a troublesome fashion, due to softer conditions. Meanwhile, continued tight labor supply help should keep a lid on the unemployment rate and maintain wage growth, which is ultimately a net benefit for economic growth.
Although consumer sentiment remains sour, it has improved recently and halted a multi-month slide. Inflation expectations moderated as well. Record-setting sales and the number of shoppers reported for Black Friday and Thanksgiving shopping signal customers feeling good enough about the economy to keep spending. While they are being selective, favoring online deals over retail shopping, spending is not limited to upper-income shoppers. Despite slower wage growth, depleted savings, and persistent cost pressures, lower-income consumer spending is still increasing—just not as rapidly as the upper end.
There are still risks, including slower/sluggish global growth in China and Europe/UK. Tariff uncertainty and volatility in freight, inventory, and sales continue to distort economic data. A laundry list of challenges remains including simmering geopolitical tensions, sluggish global growth, and a U.S. housing market that’s structurally impaired by high home prices.
The Fed’s recent and anticipated moves, including the December rate cut, mean that short-term (1-month to 3-year) yields should keep falling, easing borrowing costs for small businesses and consumers and mitigating employment risks. We expect longer-term rates to modestly decline as well, though fiscal and trade policy concerns will keep them relatively sticky, dampening relief for home borrowing costs and auto loans.
Bottom line:
The U.S. economy remains resilient, while continuing to navigate uncertainty from the government shutdown and limited economic data. Be prepared that we probably won't get a clean read on the economy until early 2026. With the Fed having moved forward to shore up the employment market with December’s cut, all eyes will be on the inflation numbers as we move through 2026.
