The 2025 economy was a mixed bag. Economic growth was strong, but job creation weakened sharply after May. Inflation fell from post-pandemic highs but remained above its pre-pandemic trend.
I expect 2026 to bring more of the same. Economic growth appears likely to remain robust, with the Atlanta Federal Reserve Bank currently forecasting growth of 3%. Three percent growth exceeds the 21st-century average. However, I believe job growth will remain weak, largely due to tariffs. Most goods imported into the United States are raw materials and other inputs used by American manufacturers. Tariffs therefore raise the cost of domestic manufacturing, translating into lower profits and reduced hiring.
Manufacturing employment has declined every month since May, with the sector losing a total of 67,000 jobs over that period.
The stock market performed well in 2025, with the Dow rising 12.5% for the year despite the tariffs. I believe the market has priced in expectations that the Supreme Court will rule these tariffs unconstitutional in 2026, helping to fuel the 2025 rally. Notably, the Dow fell from over 42,000 points on April 1 to under 38,000 points on April 2, when the so-called “Liberation Day” tariffs were announced. These tariffs were quickly reduced, and a lawsuit was filed that ultimately made its way to the Supreme Court. If the Court instead rules the tariffs constitutional and investors come to expect permanently higher tariffs, the result could be a stock market correction—or even a bear market.
The Federal Reserve has backed away from its inflation fight and begun cutting interest rates again, likely in an effort to spur job creation. However, this increases the risk that inflation will rise rather than fall.
Inflation is likely to continue running above the Federal Reserve’s 2% target in 2026. The Federal Reserve has backed away from its inflation fight and begun cutting interest rates again, likely in an effort to spur job creation. However, this increases the risk that inflation will rise rather than fall.
The $2 trillion annual budget deficit and $38 trillion national debt may also pressure the Federal Reserve to cut rates and keep them low in order to make interest payments more manageable, resulting in additional inflationary pressure.
Geopolitical events remain a significant wildcard with the potential for economic repercussions. A military conflict involving Iran or civil unrest in Venezuela following the arrest of its president could disrupt global oil production and drive prices higher. Every recession since the 1970s has been preceded by a sharp rise in oil prices. An escalation of the war in Ukraine could also cause food prices to spike, further straining the budgets of Americans already grappling with inflation. Other geopolitical flashpoints may emerge as well, with broader economic consequences.
Overall, I am cautiously optimistic about the 2026 economy. My hope is that policymakers address the deficit, scale back tariffs, and pursue diplomatic solutions to ongoing global conflicts. These steps would go a long way toward fostering a more stable and prosperous economy in 2026 and beyond.
