Economic Update Winter 2026

Economic conditions are forecast to improve in 2026 as global governments stimulate growth. The market enters 2026 with solid fundamentals; economic momentum increased in late 2025, jobless claims are bouncing around 200,000, holiday spending exceeded expectations, and Atlanta GDPNow trackers estimate fourth-quarter real growth near 4.2%, following over 4% in Q3. Overall, U.S. data reflect healthy real growth but subdued job creation, with a December unemployment rate of 4.4%. Historically, fiscal stimulus and monetary easing have helped avoid recession. Recession risk is estimated at 23%, and economic research indicates the current yield curve steepening is not typical of pre-recession periods.

There is a possibility that U.S. economic growth could reach a real GDP increase of 5% this year. Over the past two decades, U.S. gross domestic product (GDP) growth has averaged approximately 2.1%, according to Capital Group. Pro-growth policies targeting businesses and households may eventually lead to a doubling of U.S. real GDP. Many economists project an above-average economic growth rate for the year, estimating around 2.8%. Addressing national debt and budget deficits will likely require sustained economic growth, as expansion of the U.S. economy remains a critical factor in resolving these fiscal challenges.

Corporate profits are rising, supporting labor markets. The Federal Reserve has cut its key interest rate in response to job market weakness, which typically boosts company hiring and consumer spending, especially on major purchases. The "One Big Beautiful Bill Act" delivers retroactive tax cuts for 2025, resulting in higher-than-normal refunds for taxpayers in 2026, supporting further consumption. Household debt service as a share of income remains low by historical standards.

Inflation continues to ease, with falling shelter costs, which comprise nearly 40% of core CPI, softening. In December 2025, U.S. inflation was 2.7% year-over-year. Core inflation, excluding food and energy was 2.6%, above target but cooling. Third quarter 2025 Productivity gains were a whopping 4.9% and Third Quarter Unit Labor Cost declined 1.9%, both have a coolant effect on inflationary pressure. A possible military strike on Iran has reversed Brent oil prices which were trading below $60 but now have risen to $70 per barrel.

The Fed now sees tariffs as a one-off price-level shift, not a persistent inflation driver. In December, the Fed lowered rates to 3.5%-3.75%, increasing the gap between short- and long-term yields. The economy is growing steadily, unemployment is stable, and inflation (PCE Core Inflation) remains above Fed’s target but is improving. Most FOMC members do not expect further cuts unless the PCE core inflation drifts lower towards the Fed’s target. Meanwhile, the Fed is buying $40 billion a month in Treasury bills, adding market liquidity—a supportive environment for risk assets. Fewer cuts, ample liquidity, and higher long-term yields suggest market optimism for continued economic expansion through 2026.