Key Points:

  • U.S. government funding currently runs out for most agencies on January 30, 2026, so it behooves investors to have a playbook for the next round of shutdowns.

 •  Going behind the scenes of the annual outlook, we explore the various headwinds and tailwinds that will likely shape the economy in 2026.

 •  On balance, the tailwinds should overpower and set the backdrop for above-trend growth next year.

 

Bad News First

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The main headwinds for the economy next year are as follows:

1. Slowing Labor Market
2. Persistent Inflation Pressures
3. Tariffs and Trade Policy
4. Fragmented Consumer
5. Small Business Struggles

 

The official job numbers from the Bureau of Labor Statistics (BLS) are likely overstating job growth and the private data seem to support this view — at least some of the data. The weekly initial unemployment claims and continuing claims numbers are still low and suggest a stable job market, but other data paint a more dire picture. ADP private employment growth has weakened over the past several months and implies job growth in the country has slowed more than we may think. The Conference Board data support the weakening thesis.

 

Inflation is still above target, creating a second headwind, but this should be temporary. As demand cools in the coming months, pricing pressures should ease, giving investors some breathing room.

 

Trades wars are rarely helpful, and we think any speedbumps in international relations could derail growth in the economy. A tariff exemption is a special provision that allows certain goods or products to enter a country without paying the usual import duties or tariffs. So far, tariff policy has not materially increased the chance of a recession next year, but trade uncertainty is definitely a potential headwind.

 

The ‘K-shaped’ economy makes for a fragmented consumer. The affluent are fine, if not thriving, while lower income households struggle with high rent payments, rising delinquencies, and job uncertainty. As we write in the Annual Outlook, the more things change, the more they stay the same. The K-shaped economy will likely persist in the coming year.

 

Now, the Good News

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On balance, we think the tailwinds will prevail. Here’s the list:

1. Fiscal Stimulus and Policy Support
2. AI-driven Investment and Productivity Gains
3. Improving Supply Chain Dynamics
4. Falling Interest Rates
5. Strong Corporate and Household Balance Sheets

 

Several G-10 countries are deploying targeted fiscal measures to sustain growth and accelerate structural transformation. The U.S. will likely get a boost from the One Big Beautiful Bill Act (OBBBA). Infrastructure spending, renewable energy incentives, and tax policy will likely inject liquidity into the economy, creating a multiplier effect across sectors. These policies will likely stimulate consumer spending and business investment in the new year.

 

Artificial intelligence (AI) will likely be a powerful catalyst for capital spending and improved productivity. Businesses are investing heavily in AI-driven automation, predictive analytics, and smart infrastructure, which are unlocking productivity gains across supply chains and service delivery. This technological tailwind is reducing operational costs, improving decision-making, and enabling firms to scale faster, reinforcing economic resilience even amid global uncertainties.

 

Supply chain bottlenecks that plagued global trade are easing, thanks to diversified sourcing strategies and digital logistics platforms. Combined with falling interest rates, which lower borrowing costs, companies and households are better positioned to invest and spend. Strong corporate and household balance sheets amplify this effect, as healthy cash reserves and manageable debt levels provide the confidence to pursue growth opportunities, fueling a virtuous cycle of investment and consumption.

 

Concluding Remarks

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This year is ending with a bang and next year may start with another one since there’s a chance the government finds itself with another lapse in appropriations after January 30. Thankfully, there are several private sector data sources for investors to track as the economy deals with both headwinds and tailwinds.

 

As it relates to monetary policy, the Federal Open Market Committee (FOMC) cut rates by 0.25% to a target range of 3.50% - 3.75%. No surprises here. However, compared to the previous edition, the current Summary of Economic Projections has higher growth expectations, lower inflation, and lower unemployment.

 

Inflation must significantly cool for the committee to cut more than two times in 2026. The FOMC growth expectations and unemployment forecasts are too strong for committee members to pencil in three cuts. Our view is that inflation will materially ease throughout next year.

 

So the bottom line is this: there is no risk-free path for monetary policy, but it seems the committee is banking on higher productivity as the magic elixir, producing stronger growth despite softer job creation. FOMC projections of stronger growth and lower unemployment suggest the Fed could remain on hold in the first quarter, especially if the economy responds to the tailwinds from fiscal and policy support. The first cut next year may come as late as the second quarter, but it is likely too early to tell.

 

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