The U.S. economy performed fairly solidly in 2025 despite several headwinds, particularly uncertainty surrounding US trade policy, frequent changes in tariff rates, and higher permanent tariffs. In addition, conflicts and geopolitical uncertainty acted as headwinds and will probably continue to do so in 2026. In the first months of 2026, we anticipate an episode characterized by slower economic growth and still-elevated inflation. While we do not expect inflation to rise significantly in our baseline, there is a non-negligible risk of higher inflation.
In the third quarter of 2025, the U.S. economy expanded strongly by 1.1 percent (annualized 4.3 percent). Private consumption was the main driver (+0.9 percent). Exports also expanded (+2.1 percent) after having stagnated or contracted in the quarters before, while imports decreased again after a surge in the first quarter of 2025 in anticipation of higher tariffs.
GDP figures for the fourth quarter will be published at the end of January. The government shutdown had a moderately negative impact on the economy but had no lasting macroeconomic effects. Private consumption seems to have been rather robust, but we anticipate weaker private investment. In the first months of 2026, we expect only meager economic growth. The US economy remains robust, but currently relies heavily on AI-driven investments and consumption by affluent households.
The subdued economic momentum is also reflected in the labor market. Net job growth has been modest or even negative in the past months. Only 50,000 new jobs were created in December (of which 37,000 were in the private sector). This is somewhat less than generally expected, but wouldn’t be particularly bad on its own. However, the number of new jobs created in October and November was revised downward by 76,000. In manufacturing, there was again a slight reduction in jobs. While unemployment fell slightly (from 4.5 to 4.4 percent), labor force participation declined somewhat. Overall, the situation in the US labor market remains subdued.
This reinforces our view that there will be no recession, but a period of lower economic growth and job creation. At the same time, it is important to note that population growth has slowed due to new immigration/emigration policies. The breakeven rate of monthly payroll growth needed to keep up with the labor force has considerably fallen from around 150,000 jobs in 2024 to approximately 85,000 jobs (according to Kolko, 2025) or even as low as 30,000 jobs (according to the Dallas Fed). Discussions about the independence of the Fed and statistical agencies further contribute to uncertainty and a less optimistic outlook for the US economy.
Tariffs have increased dramatically in the past months. Uncertainty regarding the future evolution of tariffs has been reduced but remains elevated. The Yale Budget Lab estimates that the effective average tariff rate is now approximately 17 percent, the highest tariff rate since the 1930s. One can observe that the Trump administration uses tariffs and tariff threats as a geopolitical tool to achieve goals other than purely economic ones. This makes it more difficult to predict future tariff policies. Inflation has so far been less affected by these tariffs than initially feared. But inflation rates remain somewhat elevated.
We anticipate a period characterized by slower economic growth and somewhat elevated inflation this winter. In our baseline scenario, the economy will grow more slowly but will not enter a recession. We expect inflation to remain above the central bank target of two percent in 2026. We currently expect two more interest rate cuts by the Fed in 2026.
Average annual GDP growth will be solid in 2026 and 2027, at 1.7 and 1.9 percent, respectively. We expect no recession in our baseline scenario, though the economy will experience only modest economic growth rates in 2026 before becoming more dynamic in 2027, achieving 1.9 percent growth. The unemployment rate will continue to moderately increase in the coming months. Inflation will stay somewhat elevated in 2026 before approaching the 2 percent inflation target.
In recent months, the U.S. economy has been rather robust. Since the start of 2026, several potential stability risks have emerged, but they do not appear to be perceived as major threats to the economy. However, the risk of a sudden panic outbreak remains, especially when conditions seem calm. At IMEN, we continue to believe that the U.S. economy is somewhat more fragile than is sometimes assumed.
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