Lookahead to the 2026 Economy

As usual, there are upside and downside risks, one of which is our increasingly untethered and unchecked leader.

As 2026 gets underway, it’s a good time to polish off the crystal ball and make some informed guesses about the economic outlook for the year. As anyone who follows econ zigs and zags knows, the future these days is especially uncertain. As I was writing this, the news broke that at President Donald Trump’s behest, the Federal Reserve received grand jury subpoenas from the Justice Department, threatening a criminal indictment against Chair Jerome “Jay” Powell. The charges are nonsense, but markets reacted negatively, as they should.

I doubt this case will get very far. It’s not even clear if they could find a grand jury to indict Powell based on Trumped-up charges having to do with renovations to the Fed’s buildings, not with monetary policy. And, of course, one morning’s market freak-out says nothing about the ’26 outlook. But this is a useful microcosm of what can go wrong in our era of Trumpian chaos.

(Pavel Muravev/iStock)

That said, most forecasts, mine included, expect continued growth—recession probabilities remain low—driven by consumer spending, business investment, and new “fiscal impulse” (growth effects from extra deficit spending) from last year’s big budget bill. One important thing we learned last year is that the U.S. economy, in an aggregate sense, is a highly resilient beast. You can throw a lot of bad policy at it, but when this $30 trillion behemoth has forward momentum, it can take the hits and stay largely on course.

But there are cracks under the surface. The job market ended last year and began this one on a shaky note, and, though the data to assess this is limited, there’s evidence that economic inequality is again on the rise. And, of course, affordability will remain a dominant issue this year as too many households continue to struggle with housing, healthcare, childcare, grocery, and electricity costs.

As usual, there are risks to the forecast, and this year, my judgment is that they are largely to the downside. There are at least two, big fragilities that could push hard in the wrong direction. One, as noted, is the job market. And the second is the chance artificial intelligence is in an investment bubble. A third risk is that the worsening budget deficit could push up interest rates, a counterforce against the fiscal impulse noted above.

I’ll discuss this risk below, but let’s first run through some of the key indicators:

Real GDP growth is expected to rise on trend, around 2%. The forces behind this forecast include rising real wages and continued increases in equity values, both of which support consumer spending, which is almost 70% of U.S. GDP. Business investment is also expected to continue contributing to growth. In fact, in their ’26 outlook, analysts at Goldman Sachs said that they “expect business investment to be the strongest component of GDP in 2026, growing 5½%” over the year. Factors behind this boost include lower interest rates/capital costs and more generous tax incentives from the corporate breaks in the big budget bill.

Most forecasts, including the highly influential one by the Federal Reserve, have inflation slowing over the course of the year, as tariff effects fade. Tariffs operate like a one-time sales tax, raising inflation when they’re put in place, but having a “one-and-done” impact on the growth rate of prices.

Unless, of course, Trump keeps adding tariffs. Especially if he loses his tariff case at the Supreme Court, the administration is very likely to add new tariffs, using authorizations that are less controversial than the ones before the court. The question for inflation is how the new ones will compare with the existing ones, and that’s a level a speculation with which I won’t waste your time. My broader point is that because Trump cannot stop “negotiating” his tariff deals, it is harder than it should be for businesses and consumers to learn to live with them, and this creates an upside risk to inflation.

The job market is highly bifurcated: It’s pretty good if you have a job, and unusually unwelcoming if you don’t. Wages have been growing just under 4%, which is handily beating inflation, last seen slightly below 3%. But as I recently detailed with a set of charts, hiring came uncomfortably close to freezing in the second half of last year, leading to historically low hiring rates and longer spells spent in unemployment. And yet, the jobless rate, at 4.4%, is not that high and rose only four-tenths over 2025.

This raises the question: How can we have such low hiring and yet unemployment, a percentage point above its low point of 3.4% in April 2023, has yet to spike to recessionary levels? The answer is twofold. First, while hiring is way down, firing is not up. Layoffs remain quiescent. Unemployment insurance (UI) data, which comes out every week, is not even flashing yellow, much less red.

Second, along with weaker labor demand, we’ve seen weaker labor supply, both because of our aging workforce and Trump’s aggressive anti-immigration campaign. Think of the current job market as a high-stakes game of musical chairs. There are fewer chairs (low hires) but also fewer players trying to sit in them when the music stops (lower labor supply).

Those are the big toplines, and together they tell a story of an economy that’s likely to keep growing this year but also to continue feeling pretty insecure, especially to job seekers or those who’d like to upgrade to a better job. But there are numerous risks to this forecast.

As one example, consider the wealth effect that helped drive growth last year. This is the well-established, empirical relationship between rising equity values and consumer spending. The value of S&P increased by about $10 trillion last year, and if you apply the 2-3% wealth effect to that, you boost consumer spending by about $250 billion, close to 1% of GDP. But what if AI is a bubble, and what if that bubble even partially deflates this year? That’s a brake on consumer spending and growth.

Next, if high-fire joins low-hire in the job market—if layoffs should spike—that could shift the job market from weak to recessionary. At this point, as best we can tell, AI is not yet displacing large numbers of jobs—though it’s probably in play in the low-hire dynamic—but that could change, making AI a double source of insecurity (wealth effect and job displacement).

And then there’s the biggest wild card of all: Trump. He and his minions have come out the gate this year swinging even harder than last year. Just sticking with economically relevant actions, they’ve invaded the sovereign country of Venezuela for its oil. Given the country’s obvious political instability and the fact that the oil price is already low, major American oil companies do not seem anxious to get down there and start rebuilding the eroded infrastructure needed to get Venezuelan oil out of the ground. If they do so, however, that could push the oil price down further this year, which could show up as lower gas prices toward the end of the year (that’s an upside risk to the forecast, even as it’s a downside risk to the environment).

Next, there’s Trump’s Powell attack and the fact that the Fed chair’s term is up in May. As is widely reported, Trump can replace Powell with someone to do his bidding to push interest rates down a lot further than good policy would allow. The problem with that plan is twofold. First, the chair is but one member of the committee that votes on Fed interest rates, so Trump would have to replace more members with his puppets, something he’s also working on.

But the bigger problem for him is the markets, as some of those participants are aware that history is littered with economies that have been severely damaged, typically through runaway inflation, when the political independence of the central bank is compromised. Add to this that the U.S. government’s debt is rising to unprecedented peacetime levels, and there’s a risk that even if a Trump-driven Fed is lowering rates, markets could push hard in the other direction.

Finally, much of what we talk about when we’re talking “outlook” is about the macro or overall economy. But we all know that rising GDP doesn’t lift all boats, especially if the job market remains weak. After all, most working-age families derive their incomes from paychecks, not portfolios. And budget cuts to key programs that low- and middle-class families depend on, including nutritional and healthcare supports, are coming online this year. Key parts of the household budget that were unaffordable to many families last year will remain so this year.

So, bottom line, the good news is that absent unforeseen shocks, aggregate growth should proceed apace this year. The bad news is that it will do so with a few more downside risks thrown into the mix and an increasingly unstable, unchecked leader growing even more volatile.

Either way, I’ll be closing tracking all these zigs and zags as they unfold.

Jared Bernstein was chair of President Biden’s Council of Economic Advisers.

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