The US economy ended 2025 looking healthier than most forecasts predicted. Growth picked up late in the year, inflation cooled from its peak and financial markets delivered another strong year with the S&P 500 raising 16%.
But the fundamentals are still hard to ignore. Jobs became harder to find, pay gains slowed and households kept struggling with prices that never came back down.
In 2026, the US administration is preparing to loosen policy on several fronts at once. That choice may lift growth in the short term.
It may also reveal how narrow and fragile the current expansion really is.
Growth looks strong but it is doing less work
The most cited number from 2025 is the third-quarter GDP. Output grew at an annualized rate of about 4.3%, the fastest pace in two years.
Consumer spending held up, and business investment rose, especially in software and computing tied to artificial intelligence.
Annual growth tells a more modest story. Most estimates put full-year 2025 growth close to 2%. That is respectable, but not exceptional for an economy running large deficits and benefiting from strong asset markets.
Much of the late-year strength also followed a weak period earlier in the year that included a prolonged federal government shutdown. Some of the rebound reflects delayed activity rather than new demand.
What matters more is how that growth is spreading, or whether it is spreading.
In fact, outside health care and social assistance, employment barely grew last year. Manufacturing lost jobs for most of the year. Output rose while hiring did not keep pace.
That disconnect is central to understanding why confidence remains low even as GDP prints look good.
The labor market cooled faster than expected
By November, the unemployment rate had risen to 4.6%, up roughly half a point over the year.
That level is still low by historical standards, but the direction is what economists are zooming in on. Hiring slowed steadily through the year, and job gains became smaller and more uneven.
Wages followed the same path, with measures such as average hourly earnings and the employment cost index decelerating to their slowest pace since 2021.
More than one in ten workers saw no pay increase at all during much of the year. For college-educated workers, unemployment reached levels rarely seen outside recessions.
Black unemployment rose sharply as more workers entered the labor force but found fewer openings.
Now, though Layoffs remain limited, the labor market hasn’t collapsed. But it is a market that no longer offers easy exits or rapid pay growth.
When growth becomes job-light, households feel risk more acutely. That perception feeds back into spending decisions, even if headline consumption numbers stay afloat for a time.
Inflation cooled, but prices stayed high
Inflation fell to 2.7% year over year in November, roughly where it averaged for 2025. That is a clear improvement from the peaks of 2022. It is also still above the 2% target of the Federal Reserve.
For households, the bigger issue is not the rate of inflation but the level of prices. Food, housing, insurance, and utilities all remain far more expensive than they were before the pandemic.
CBS News polling shows that about seven in ten Americans say they are struggling to afford basics. Utility bills rose by double digits over the past year. Heating costs climbed again this winter.
Falling gasoline prices helped at the margin. Tariffs did not trigger the inflation spike many economists feared. But the relief has been partial and uneven.
Until wages grow faster than prices for several years, most households will not feel ahead. That is why inflation that looks manageable in macro models still feels punishing on kitchen tables.
2026 brings stimulus with conditions attached
Policy in 2026 is set to turn more supportive. Tax changes enacted in mid-2025 will show up in refunds and lower withholding.
Government spending will normalize after last year’s shutdown.
The Fed has already cut rates three times, bringing its benchmark to 3.5-3.75%. Markets expect two more rate cuts in 2026.
Some analysts argue this combination could lift growth meaningfully. Others are not convinced.
The Federal Reserve Bank of Philadelphia’s survey of professional forecasters sees growth slowing slightly to around 1.8% in 2026.
The Fed’s own projections imply limited room for further easing unless inflation falls faster or the labor market weakens more.
And finally, US politics adds another layer to the growth story. President Trump has openly pressed for lower rates and will likely appoint a more dovish Fed chair when Jerome Powell’s term ends.
That may tilt policy, but it also raises the risk that investors demand higher long-term yields if they doubt the Fed’s commitment to price stability.
In that case, an easier short-term policy would be offset by tighter financial conditions elsewhere.
As for the stock market, it is likely to remain supportive of the economy, but may no longer be a reliable engine for broad growth.
After three consecutive years of double-digit gains, most Wall Street forecasts point to smaller advances in 2026.
Estimates cluster between mid-single-digit and low-double-digit returns, with the S&P 500 expected to rise less than it did in 2025.
That still boosts household wealth, but mainly for higher-income Americans who own most equities.
It reinforces the gap between market strength and everyday experience.
The real test is whether growth spreads or stalls
The sharpest divide between optimistic and cautious forecasts comes down to breadth. If tax refunds and lower rates boost spending while hiring stabilizes and wages reaccelerate, 2026 could look stronger than consensus expects.
Equity markets would support consumption through wealth effects, and investment in AI and technology would continue.
If not, stimulus may lift top-line growth without fixing the weak core. An economy that relies on asset prices, narrow investment, and fiscal support can grow for a while. It does not generate broad confidence.
Inflation would not need to surge for problems to appear. Even a slow drift above target could force the Fed to pause while households remain squeezed and hiring stays thin.
That is the tension heading into 2026. The US economy appears lopsided.
Policymakers are choosing to push demand harder at a time when supply constraints have not fully eased, and labor markets are already cooling.
Whether that produces a stronger expansion or simply delays a reckoning will define the year ahead.
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