Economic factors to watch in 2026

Inflation, Employment and Productivity

The Federal Reserve’s interest rate policy balances its desire to maintain a robust economy and full employment with its desire to limit inflation. The Fed cut interest rates three times for a total of 75 bps in 2025, on top of three cuts for 100 bps in 2024. 

These cuts do not appear to have stoked a meaningful change in inflation to date, but as tariffs become permanent and the government continues to spend trillions more than it collects in revenue, the threat of inflation remains constant.

One of the greatest weapons against inflation will be productivity growth. Today, business leaders and economic experts seem to be pinning their hopes on new AI technologies to usher in an age of automation and rapid productivity growth. History has proven that new technologies take years to work their way into business processes, so we do not expect a silver bullet cure for inflationary pressure.  

However, we do believe in the power of new AI technologies to streamline work and eliminate both blue and white-collar jobs. In fact, we believe we are at the beginning of a workforce transformation that will lead to the elimination of many existing jobs and hopefully the creation of many new roles as the economy evolves.

The unemployment rate rose in 2025 from 4% in January to 4.6% in November and we expect it to continue growing in 2026, despite a reduction in the immigrant labor pool.  Unemployment is especially high for younger Americans with less experience, and we see entry level jobs being the first jobs being automated away by AI. We can only hope that the dynamism of the US economy is able to create new, inspiring roles for those being displaced by automation.

Tariff Policy/Political Environment

The Trump Administration entered office in January 2025 determined to deliver on its promise of lower taxes, less regulation, smaller government, higher tariffs, tighter immigration and a reduction in the undocumented population. Objectively speaking, it has delivered on most of these goals.

It remains to be seen, however, whether these policies will deliver the growth, low inflation, and improved employment prospects for the middle class that were promised along with these policies. Early indications are mixed.

What we do believe is that the tariff increases of 2025 are here to stay. We do not expect the Supreme Court to rule against the administration’s ability to impose tariffs in a way that would meaningfully reduce their impact going forward or cause the money collected to date to be repaid. 

We expect current economic policy to remain in place through the swearing in of a new Congress in January 2027, with a bend toward higher tariffs and lower interest rates. The combination of these policies has the potential to drive inflation higher while the unemployment rate continues to rise.

Retail

Retail sales also grew at a slower rate in 2025 as consumer sentiment fell and tariff uncertainty disrupted consumption patterns. Discretionary durable goods such as home furnishings grew in the first half of the year but trailed off in the latter half as tariffs grew and inventory purchased early to avoid tariffs was consumed.  

With the possible exception of agriculture, no industry was hit harder by tariffs in 2025 than the retail sector. We expect this pain to continue in 2026 as retailers who had be holding off raising prices succumb to the economic realities of the modern tariff economy.

We also expect online retail sales to continue growing faster than bricks and mortar. In 2025, online retail sales grew at over 5% annually, while bricks and mortar sales grew at around 4%. This gap was likely diminished by the elimination of the de minimums rule which allowed manufacturers abroad to ship items valued at less than $800 to US consumers tariff free. 

The elimination of de minimus made online retailers that source items direct from overseas manufacturers less competitive. In total, online retail sales accounted for a little over 16% of domestic retail sales in 2025.