2026 is off to a solid start with steady growth, an upside surprise in job growth, and relatively stable inflation. While we still don’t have a complete picture due to the economic data disruption during the fall government shutdown, there are positive signs in manufacturing and services gauges, and personal income along with improved consumer sentiment that offer promise for the months ahead.
The job market continues to provide the stability the economy needs with steady hiring, layoffs, and participation. The January labor report showed a surprising increase of 130,000 jobs, although gains were concentrated in health care and construction, while federal government and financial activities lost jobs. The employment rate slipped to 4.3%. Annual benchmark revisions lowered the job gains during all of 2025 to a seasonally adjusted 181,000, or just 15,000 per month.
Inflation hasn’t gone away but seems benign for now. It’s above the Fed’s target of 2%, after staying in a range between 2.5% and 3.0% throughout 2024 and 2025. The risk of geopolitical events or aftereffects of tariff resets upsetting inflation still lingers.
Solid consumer spending and a boost from net exports have supported gross domestic product (GDP) levels recently. Manufacturing expanded in January, halting 10 months of contraction as seven of the ten subcomponents grew. We expect U.S. growth to rise to 2.5% in 2026 thanks to tax incentives for consumers and businesses, marginally lower borrowing costs, steadier trade policy and tariffs, and continued investment in AI and technology spending.
Given a stabilization in labor markets over the past months, at its January 28th meeting, the Federal Reserve (Fed) chose to pause further rate cuts. We didn't expect any changes at that meeting, especially since the Fed had already cut rates by a total of 1.75% over the past 18 months, including at each of the three prior meetings. Looking ahead, we maintain our view that the next rate cut will be in the spring as the Fed continues heading towards 3% over the course of 2026.
President Trump tapped Kevin Warsh to be the next Chair of the Fed. Warsh is a straightforward, traditional choice combining Wall Street, White House, and Fed Governor experience over his career. He’s been known as an inflation hawk in the past and critical of the growth of the Fed’s balance sheet, a result of quantitative easing. As a qualified candidate, we don’t expect any issues with his nomination process.
Bottom line:
The U.S. economy remains resilient. But with data muddied by the government shutdown, we likely won’t get a clear read until late February or early March. Expect an uptick in U.S. growth during 2026 to 2.3% thanks to four primary drivers – tax incentives for consumers and businesses, marginally lower borrowing costs thanks to Fed easing, steadier trade policy and tariffs, and continued investment in AI and technology spending.
