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The economy will pick up the pace a little bit in 2026, with some help from Washington. However, it will have to overcome some mounting headwinds.
Look for Gross Domestic Product (GDP) growth of about 2.5% this year, a little better than 2025’s 2.1%. A few factors look set to give inflation-weary consumers a boost while encouraging businesses to ramp up spending.
Bigger tax refunds will hit bank accounts after the filing season opens late this month. Changes in the tax code enacted in last year’s tax overhaul should translate into $65-$100 billion more in refunds. Much of that extra money will be spent on things like car down payments, along with smaller purchases and, in some cases, paying down debt or extra savings. For lower-income households dealing with high prices, a bigger refund is no panacea, but it certainly helps. Refunds aside, consumer spending is strong, despite surveys showing consumers in a sour mood.
The wealthy in particular will keep spending, buoyed in part by hefty gains in their investments and their home values. Total household net worth is up 26% from three years ago, to $180 trillion.
And the Federal Reserve is going to trim interest rates a bit more this year, on the heels of last year’s cuts, making credit a little bit cheaper for many borrowers.
Other positives are linked to the economy’s underlying fundamentals. Productivity growth is perking up after many years of stagnating at low levels. Economists aren’t sure why, exactly, but output per worker is rising by about 2% now. Capital investment is climbing, driven in part by the tax law’s extension of 100% bonus depreciation, plus the continued frenzy of data center construction.
It won’t all be smooth sailing, though. Most obviously, hiring is way down and shows little sign of rebounding. There’s no sign of an outright jobs contraction, but monthly job creation is likely to bump along near December’s level of 50,000 new jobs. Employers aren’t laying off workers in large numbers, but they aren’t hiring eagerly, either.
Some are using AI to make do with less. One recent survey showed that 17% of businesses reported using AI for at least one function. For unemployed folks, it’s a daunting job market, and that’s something people with jobs are well aware of. If layoffs do mount, many workers will up their saving and spend less in response. Spending by the affluent could sputter if the stock market tumbles. The top 10% of households by income now account for half of consumer spending.
Tariff policies remain a moving target for businesses that rely on imports or are exposed to retaliatory duties on American goods, making it harder to plan.
And of course, the geopolitical situation remains highly uncertain. A crisis could break out in any number of trouble spots with no notice during this volatile year.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
