The US Economy in 2026: More Growth, or Living on Borrowed Time?

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Record-breaking energy production and historic holiday spending coexist uneasily with rising unemployment, depleting household savings, and a manufacturing sector grappling with the unintended consequences of aggressive protectionism.

The government shutdown left policymakers and the public without all of the normal data on hand to navigate a complex turning point with intermittent and noisy signals.

The narrative of late 2025 is not one of simple boom or bust, but of a profound restructuring. The passage of the “One Big Beautiful Bill Act” (OBBBA) in July has fundamentally altered the fiscal terrain, introducing novel tax exemptions that reshape compensation structures while simultaneously paring back the social safety net and reversing the previous administration’s green energy industrial policy.

Meanwhile, the Federal Reserve, having initiated a cutting cycle in response to a cooling labor market, faces an internal schism over the threat of re-igniting inflation amidst fiscal stimulus and tariff-induced price pressures.

The Data Blackout

The final quarter of 2025 will be etched in economic history not solely for the trends it established, but for the profound opacity that shrouded them. The federal government shutdown, which spanned from October 1 to November 12, 2025, was the longest in the nation’s history, surpassing the previous record set in 2018-2019.

While political brinksmanship is a recurring feature of American governance, the economic fallout of this specific hiatus was distinct in its timing and severity, occurring precisely when the Federal Reserve required absolute clarity to engineer a “soft landing.”

The Statistics Gap

The immediate casualty of the shutdown was the flow of official economic data. The Bureau of Labor Statistics (BLS), the Bureau of Economic Analysis (BEA), and the Census Bureau suspended operations, creating a statistical blackout during a critical window.

The most significant loss was the inability to collect household survey data for October 2025. Consequently, the BLS could not publish an October Employment Situation news release, leaving a permanent gap in the official unemployment series.

When data collection resumed in November, the resulting reports were marred by what statisticians term “noise.” The collection rates were lower than average, and the methodology had to be adjusted to account for the interruption.

This “data fog” forced the Federal Reserve and private analysts to rely on imperfect proxies and anecdotal evidence at a moment when the labor market was showing signs of a pivot. The divergence between “hard data” (official government statistics) and “soft data” (surveys and sentiment) widened, creating an environment where policy errors became a heightened risk.

The Economic Cost

Beyond the epistemic crisis, the shutdown imposed direct costs on the economy. The Congressional Budget Office estimated that real Gross Domestic Product (GDP) was reduced by $18 billion in the fourth quarter of 2025 due to lost output from furloughed federal workers and delayed government spending.

While standard economic theory suggests that such output is often recovered in subsequent quarters as back pay is distributed and contracts are fulfilled, the “rebound effect” anticipated in Q1 2026 is unlikely to fully offset the loss in momentum.

Small businesses, often operating with thinner liquidity buffers than major corporations, bore the brunt of the administrative freeze. The Small Business Administration was unable to process loan applications, preventing approximately $2.5 billion in federally backed funding from reaching 4,800 small businesses.

This liquidity crunch occurred during the critical pre-holiday inventory build-up period, forcing many enterprises to rely on expensive alternative financing or to curtail operations, contributing to the softness seen in small business hiring data late in the year.

The Labor Market Cools

For much of the post-pandemic era, the US labor market was defined by its tightness—a “Golden Age” for workers where jobs were plentiful and leverage resided with employees. However, the data emerging from late 2025 indicates a decisive shift.

The labor market has cooled, moving from a state of overheating to one of fragility, characterized by rising unemployment and deep sectoral bifurcation.

Rising Unemployment

The release of the November 2025 employment report was a watershed moment. The unemployment rate climbed to 4.6 percent, a significant increase from the 4.2 percent recorded a year prior and a marked departure from the sub-4 percent lows that characterized the previous administration’s tenure.

This rise represents an increase of approximately 700,000 unemployed persons, bringing the total number of jobless Americans to 7.8 million.

The dynamics driving this increase are complex. Unlike a typical recessionary spike driven purely by mass layoffs, the rise in unemployment in late 2025 was partly fueled by “re-entrants”—individuals returning to the labor force to look for work, perhaps driven by the depletion of pandemic-era savings or the rising cost of living.

However, the “Sahm Rule”—an indicator that signals a recession when the three-month moving average of the unemployment rate rises by 0.50 percentage points relative to its low during the previous 12 months—has been triggered in several regional Federal Reserve models, raising alarm bells among economists.

Sectoral Divergence

The aggregate unemployment figure masks a sharp divergence between sectors. The economy is no longer lifting all boats; rather, specific industries are expanding while others contract, often driven by the specific policy choices of the OBBBA and the administration’s trade agenda.

The Manufacturing Recession

Perhaps the most politically sensitive development is the contraction in manufacturing employment. Despite the administration’s rhetoric regarding a “new American industrialism,” the sector has struggled significantly.

Since the imposition of aggressive tariffs in April 2025, manufacturing employment has declined by 42,000 jobs through August and continued to bleed jobs into the winter.

The economic logic here is brutal but clear: while tariffs protect primary metal producers (steel and aluminum), they raise costs for downstream manufacturers who use those metals to make cars, appliances, and machinery. These downstream industries employ far more workers than the primary metal industries, leading to a net loss in manufacturing jobs.

The Tech Freeze

The technology sector, particularly centered on the West Coast, has not returned to the exuberant hiring of the early 2020s. Entry-level hiring for tech roles has plummeted by 50 percent compared to pre-pandemic levels, creating a “lost generation” of recent graduates who are finding it increasingly difficult to break into the industry.

Companies are prioritizing efficiency and AI integration over headcount growth, leading to a “jobless recovery” in the tech sector even as stock valuations soar on AI optimism.

Wage Stagnation

Wage growth has decelerated alongside hiring. Average hourly earnings rose by 3.5 percent year-over-year in November 2025. While this is arguably a healthy level consistent with the Fed’s inflation targets, it offers little catch-up growth for workers who saw their purchasing power eroded by the inflation spikes of 2022-2024.

More concerning is the distribution of this growth. Data from the Atlanta Fed’s Wage Growth Tracker indicates that the “job switcher premium”—the extra pay increase workers get for changing jobs—has compressed.

This signals a decline in worker leverage; employees are less confident in quitting to find better pay, leading to lower turnover and stagnation in wage mobility. Furthermore, after-tax wage growth for lower-income households has slowed to just 1.4 percent, significantly lagging behind the 4.0 percent growth seen by higher-income households.

This widening gap exacerbates income inequality and threatens to dampen mass-market consumption in 2026.

Inflation’s Sticky Floor

The battle against inflation in 2025 has been a war of attrition. While the headline numbers have retreated from the multi-decade highs of the post-pandemic period, price stability remains elusive, kept aloft by a combination of persistent service-sector demand and new, policy-induced price shocks.

The Numbers

As of November 2025, the Consumer Price Index rose 2.7 percent year-over-year, with Core CPI (excluding volatile food and energy components) at 2.6 percent.

While these figures are technically closer to the Federal Reserve’s 2 percent target, they represent a “sticky floor” rather than a continued descent. The “last mile” of disinflation has proven the hardest, complicated by the administration’s trade policies.

The Tariff Impact

A significant driver of the stalled progress on inflation is the resurgence of goods inflation driven by tariffs. The administration raised the average effective US tariff rate from 2.4 percent to 16.8 percent in 2025.

Economic analysis from the Budget Lab at Yale confirms that these costs are not being absorbed by foreign exporters but are being passed through to US importers and consumers.

Prices for apparel, groceries, autos, and electronics—categories that had been sources of disinflation in 2024—have seen renewed upward pressure as the tariff costs filter through the supply chain.

Housing and Services

Shelter inflation, which constitutes the largest component of the CPI basket, has finally begun to show meaningful moderation, reaching its lowest levels since before the pandemic. This is a lagging indicator of the cooling housing market, finally showing up in official data.

However, this relief is being offset by rising costs in “supercore” services, particularly insurance and medical care. The cost of auto and home insurance has surged, driven by climate-related risks and higher vehicle repair costs.

Additionally, the OBBBA’s cuts to healthcare subsidies are expected to increase out-of-pocket medical costs for millions of Americans, creating a “shadow inflation” that reduces disposable income even if it’s not fully captured in the standard CPI metric immediately.

The Credit Crisis

The American consumer has been the indomitable engine of the US economy, defying predictions of a recession for three years. However, as 2025 draws to a close, the fuel for this engine—excess savings—has run dry, and the engine is increasingly running on high-octane, high-cost debt.

Savings Depleted

Research from the San Francisco Fed indicates that the stock of “excess savings” accumulated during the pandemic stimulus era was fully depleted by the third quarter of 2025.

This financial buffer allowed households to absorb the initial shock of inflation without cutting spending. With this buffer gone, the personal savings rate has dropped to 4.7 percent, well below the historical average.

This implies that every dollar of new consumption is now being funded by current income or new borrowing.

The Holiday Spending Surge

The 2025 holiday season is projected to break records, with sales surpassing $1 trillion. However, the composition of this spending reveals a consumer under stress.

A TransUnion study found that 42 percent of shoppers planned to use credit cards as their primary payment method, a sharp increase from 2024.

More alarmingly, the use of Buy Now, Pay Later (BNPL) services has exploded. BNPL facilitated over $20 billion in spending during the 2025 holiday season alone.

The BNPL Problem

This form of “shadow debt” is particularly prevalent among younger consumers (Gen Z and Millennials) and lower-income households. Because BNPL loans are often not reported to credit bureaus, the official debt-to-income ratios tracked by the Fed may significantly understate the true leverage of American households.

Delinquency rates on these loans are rising, with nearly 25 percent of users missing a payment in 2024, a trend that accelerated into late 2025.

Rising Delinquencies

While aggregate household balance sheets appear healthy due to high asset prices (stocks and homes), the cash-flow reality for many families is deteriorating. The New York Fed reports that serious delinquencies (90+ days past due) for auto loans rose to 2.99 percent in Q3 2025.

In the hierarchy of consumer payments, the car loan is typically the last thing a household defaults on, as a vehicle is essential for employment. A rise in auto delinquencies is a potent signal of distress among working-class families.

Similarly, credit card delinquencies have plateaued at an elevated rate of roughly 7 percent, suggesting that millions of households are trapped in a cycle of minimum payments at punitive interest rates.

Housing Market Paralysis

The US housing market in late 2025 can best be described as structurally paralyzed. It’s not crashing, as tight supply prevents a price collapse, but it’s deeply frozen, with transaction volumes hovering near multi-decade lows.

The Lock-In Effect

The primary culprit remains the “lock-in effect.” Over 60 percent of US mortgages carry an interest rate below 4 percent.

With the average 30-year fixed mortgage rate settling around 6.21 percent in December 2025, homeowners are financially disincentivized to sell. Moving would mean trading a 3 percent mortgage for a 6 percent one, resulting in a massive increase in monthly payments for the same (or less) house.

Consequently, existing home inventory remains historically tight, standing at just a 4.2-month supply in November.

Prices Keep Rising

Despite the lack of activity, prices continue to grind higher due to the scarcity of supply. The median sales price for existing homes reached $409,200 in November 2025, up 1.2 percent year-over-year. This marks 29 consecutive months of price gains.

The market has become bifurcated between those who have equity and cash, and those who rely on financing. “All-cash” buyers accounted for nearly 30 percent of transactions in late 2025, a near-record high.

These buyers—often investors or wealthy retirees—are immune to mortgage rate fluctuations, crowding out first-time homebuyers who are increasingly sidelined by the twin hurdles of high prices and high rates.

Builder Incentives

With the resale market frozen, homebuilders have become the only game in town. The National Association of Home Builders Housing Market Index rose slightly to 39 in December.

While any reading below 50 indicates negative sentiment, the uptick reflects a realization that builders control the marginal supply. Large public builders are using their balance sheets to offer mortgage rate buydowns—effectively subsidizing the interest rate for buyers to 5.0% or 5.5%—to keep inventory moving.

This financial engineering has allowed new home sales to outperform the resale market, but it comes at the cost of builder margins.

The One Big Beautiful Bill

The defining domestic policy achievement of 2025 was the passage of the “One Big Beautiful Bill Act” (OBBBA), signed into law on July 4th. This omnibus legislation represents a radical restructuring of the US tax code and social safety net, implementing a populist fiscal agenda that combines targeted tax relief with deep spending cuts.

The Tax Cuts

The OBBBA introduced several high-profile tax changes aimed at specific segments of the workforce, effective from 2025 through 2028:

Spending Cuts

To offset the revenue loss from these tax cuts, the OBBBA enacted sweeping reductions in federal spending, fundamentally altering the social contract:

Medicaid Overhaul: The legislation cuts approximately $1 trillion from Medicaid over a decade. It introduces strict work requirements and mandates more frequent eligibility checks (every 6 months instead of 12).

Estimates suggest that up to 7.8 million people could lose coverage, disproportionately affecting young adults and low-income families in expansion states. This represents a significant shifting of healthcare costs from the federal government to states and hospitals (via uncompensated care) and to individuals.

Green Energy Repeal: The OBBBA repealed key sections of the Inflation Reduction Act, specifically the 25C and 25D residential energy credits for solar, battery, and efficiency upgrades, effective December 31, 2025.

This policy reversal has created a “demand cliff” for the solar industry, with a rush of installations in late 2025 likely to be followed by a sharp contraction in 2026.

Safety Net Reductions: The bill includes cuts to the Supplemental Nutrition Assistance Program (SNAP) and reforms to student loans that reduce federal subsidies, further tightening the financial squeeze on lower-income households.

Deficit Reality

Despite the “pay-fors” included in the bill, the fiscal outlook remains challenging. The CBO projects the FY2025 deficit at $1.9 trillion, or 6.2 percent of GDP.

The tax cuts are immediate, while the spending reductions accrue over time, leading to a near-term widening of the fiscal gap. The national debt is projected to reach 118 percent of GDP by 2035, raising structural concerns about the government’s long-term financing costs, especially as interest rates remain elevated compared to the pre-2022 era.

Trade Wars Continue

2025 marked the aggressive return of protectionism as the central tenet of US economic policy. The administration’s strategy of using tariffs as a blunt instrument to force re-shoring has triggered a complex web of retaliatory measures that are reshaping global supply chains.

The China Détente

Relations with China remained the fulcrum of global trade volatility. Early 2025 saw the imposition of severe tariffs and export controls on Chinese goods.

However, in November 2025, a “historic agreement” was announced. In exchange for China suspending export controls on critical minerals (gallium, germanium) and resuming long-term purchases of US agriculture (soybeans, sorghum), the US agreed to suspend certain retaliatory tariffs.

This détente provided much-needed relief to American farmers, who had seen their export markets evaporate. However, the broader “tech war” continues unabated.

The US maintains strict controls on semiconductor exports and investment in Chinese AI sectors, signaling that while agricultural trade may flow, the strategic decoupling in high technology is permanent.

Europe Takes a Hit

The trade conflict expanded significantly to include traditional allies in Europe. The administration reinstated Section 232 tariffs on European steel and aluminum, viewing the trade deficit with the EU as a national security issue.

The EU responded with countermeasures targeting €18-26 billion of US goods.

The impact on the German automotive sector has been particularly severe, with German car exports to the US dropping nearly 14 percent in the first nine months of 2025.

This friction threatens to dampen growth in the Eurozone, which in turn reduces demand for US services and technology exports, creating a negative feedback loop for the global economy.

Energy Dominance

Energy policy in 2025 shifted diametrically away from the green transition and toward a strategy of “energy dominance” through fossil fuels.

Record Production

On January 20, 2025, the President signed Executive Order 14154, titled “Unleashing American Energy,” which mandated the removal of regulatory burdens on fossil fuel production and expedited permitting for pipelines and drilling on federal lands.

The results have been stark. By late 2025, US crude oil production hit a record 13.5 to 13.6 million barrels per day (bpd). Natural gas production also surged to record highs.

This flood of American supply has been the primary factor keeping global oil prices suppressed, with Brent crude forecast to average around $69 per barrel in 2025 and drop further to $52 in 2026.

The Green Retreat

While fossil fuels boomed, the renewable sector faced significant headwinds. The repeal of the IRA tax credits under the OBBBA has stalled the momentum of the green transition.

Wind and solar developers, facing the expiration of the Production Tax Credit (PTC) and Investment Tax Credit (ITC), rushed to complete projects in 2025. However, the pipeline for 2026 and beyond has thinned dramatically.

This policy whiplash creates extreme uncertainty for investors and virtually guarantees that the US will miss its Paris Agreement climate targets. Conversely, the low energy prices resulting from the fossil fuel boom act as a powerful disinflationary force, providing relief to consumers at the gas pump and lowering input costs for heavy industry.

The AI Investment Boom

While the labor market for tech workers has cooled, the investment in technology remains a primary driver of US GDP. The “AI Arms Race” among hyperscalers (Microsoft, Google, Amazon, Meta) shows no signs of abating, decoupling the sector’s capital spending from its hiring practices.

The $500 Billion Bet

Capital expenditure (Capex) by AI hyperscalers is projected to exceed $527 billion in 2026. This massive injection of capital is fueling a boom in data center construction, power generation infrastructure, and semiconductor demand.

Goldman Sachs estimates that this investment phase is significantly boosting GDP growth in 2025 and 2026, even if the productivity benefits are still years away.

This dynamic explains why the US economy continues to grow despite weakness in consumption and manufacturing. The construction of data centers and the manufacturing of the chips that power them are capital-intensive activities that generate significant economic activity.

However, fears of an “AI bubble” persist, as investors increasingly scrutinize the gap between this massive infrastructure spending and the actual revenue generation from AI applications.

The Federal Reserve’s Dilemma

The Federal Reserve’s actions in late 2025 reflected a central bank walking a tightrope between a cooling labor market and persistent, tariff-driven inflation.

The December Cut

In December 2025, the Federal Open Market Committee cut the federal funds rate by 25 basis points to a range of 3.50%-3.75%. This marked the third consecutive cut of the cycle. The rationale was clear: with unemployment rising to 4.6 percent, the Fed pivoted to protecting the “maximum employment” side of its dual mandate.

However, the decision was far from unanimous. The meeting revealed deep divisions within the committee. While the vote appeared unified, the “Dot Plot” (Summary of Economic Projections) signaled a hawkish turn for the future, projecting only one additional rate cut in 2026—contradicting market expectations of two or more.

Analysts noted the presence of “silent dissenters”—members who voted for the cut for the sake of consensus but whose anonymous projections indicated a preference for higher rates.

This internal friction suggests that the Fed is terrified of a 1970s-style resurgence of inflation driven by the fiscal stimulus of the OBBBA and the inflationary pressure of tariffs.

Quiet QE

Quietly, the Fed resumed purchases of short-term Treasuries at a pace of $40 billion per month in December.

While framed as technical balance sheet management to smooth money markets, this liquidity injection effectively supports the bond market at a time of high deficit issuance. Critics argue this blurs the lines between monetary policy and fiscal accommodation, potentially undermining the Fed’s independence in the long run.

The 2026 Outlook

As the United States enters 2026, the economic forecast is one of “sturdy growth” shadowed by significant tail risks. The economy has proven remarkably resilient, absorbing the shocks of high interest rates and political volatility, but the buffers that provided that resilience—excess savings and a tight labor market—are eroding.

Growth Projections

Goldman Sachs: Remains bullish, forecasting US economic growth to accelerate to 2.1-2.4% in 2026. Their model places significant weight on the positive fiscal impulse from the OBBBA tax cuts and the ongoing boom in AI investment.

JP Morgan: Adopts a more cautious stance, forecasting stable growth of roughly 1.8% but assigning a 35% probability to a recession in 2026. Their concern centers on the potential for policy errors or trade shocks to derail the expansion.

Consensus: Most major institutions see growth moderating but remaining positive, supported by business investment and a recovering (albeit slowly) housing sector.

The Key Risks

The Bond Vigilantes: With federal deficits running near $2 trillion and inflation remaining sticky above 2.5%, there’s a substantial risk that long-term Treasury yields could spike.

If investors demand a higher risk premium for holding US debt, the 10-year yield could break above 4.5% or 5.0%, which would crush the nascent housing recovery and trigger a broader financial tightening.

Trade War Escalation: The current détente with China is fragile. If the agreement collapses, or if the EU retaliates aggressively against US technology firms or agriculture, the manufacturing recession could deepen and spill over into the broader service economy.

The Consumption Cliff: The combination of depleted savings, rising delinquency rates, and a softening labor market creates a precarious environment for consumption. If the “wealth effect” from the stock market reverses, American households could pull back spending sharply, removing the primary pillar of economic growth.

The Bottom Line

The US economy in late 2025 is a machine running on mixed fuels. It’s powered by the high-octane stimulus of AI investment and deficit spending, but dragged down by the friction of tariffs and the weight of accumulated debt.

For the average American, the “aggregate” success of the economy—measured in GDP or stock prices—may feel increasingly disconnected from their daily reality of high prices, expensive credit, and job insecurity.

2026 promises not a collapse, but a grind: a year where growth is purchased at the price of higher debt and continued uncertainty. The statistical blackout from the 2025 shutdown has made navigating this transition even harder, as policymakers fly partially blind through economic turbulence.

The fundamental question facing the American economy is whether the productivity gains from AI investment will materialize quickly enough to validate the massive capital expenditure, or whether the weight of consumer debt, trade friction, and fiscal imbalances will finally pull the expansion off track.

The answer will likely become clear not in the headline GDP numbers, but in the lived experience of millions of households trying to make ends meet in an economy that looks strong on paper but feels fragile in practice.

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