At the start of 2025, investors were bullish on the American economy. With a pro-business president and consumer and investor confidence finally recovering from the Biden COVID hangover, 2025 promised to be a boom year.
Instead, the U.S. economy was a decidedly mixed bag for half the year. Inflation remained stubbornly high at 3.4%, and unemployment increased in the first quarter, driven by declines in business investment, government spending, and exports. The economy contracted by 0.6% in the initial quarter of 2025.
Things looked better in the second quarter with a robust 3.8% GDP growth rate and inflation moderating to 2.1%. Private goods-producing industries saw a major turnaround, jumping from a 5.9% decrease in Q1 to a 10.2% increase in Q2. By the third quarter, GDP growth had taken off, coming in at 4.3% and promising more of the same for the fourth quarter.
What will the economy be like in 2026?
It’s good to note that voters rarely care about macro views of the economy. Biden talked about his “great” economy until he was blue in the face, but voters didn’t believe the relatively good numbers. The macro view did not translate into a belief that Biden’s economy was a “good” economy.
What will make 2026 different is the cold, hard cash that’s going to be in people’s pockets.
Treasury Secretary Scott Bessent said he expects Americans to receive up to $150 billion in tax refunds early next year as a result of the budget law the president signed last summer. Higher earners who spend a smaller share of their income will feel a bigger impact, with the notable exception of people who earn tipped income. Nonetheless, the Congressional Budget Office expects the tax cuts to boost demand and labor supply in the next year. Trump also says he will send $2,000 checks to most households next year to assuage affordability concerns. That should probably be taken with a grain of salt, but the overall direction of tax policy is more spending and confidence for consumers.
Trump’s promise of a $ 2,000-per-taxpayer tariff windfall would require congressional approval, which would depend on which party controls both chambers in 2026. Nevertheless, the changes already in place will put more money in taxpayers’ pockets.
Businesses will also have more money due to changes in the budget law wrought by the One Big Beautiful Bill (OBBB) that allows corporations to deduct 100% of equipment purchases in the year they are incurred. For some heavy industries like manufacturing, construction, trucking, and energy, the savings are substantial.
A $300,000 manufacturing production line could see first-year tax savings of up to $110,000. A $150,000 restaurant kitchen could save $55,000. To qualify, the equipment must be “placed in service” (installed and operational) by Dec. 31 of the tax year.
Another sign that the boom will continue is that energy prices will continue to fall. “The CBO predicts the tax provisions that encourage more production of oil and gas will also have a positive impact on GDP next year,” notes Bloomberg. “It estimates the impact will be larger in the next few years because some of the regulations are temporary, but it’s not inconceivable that a greater supply of energy will reduce the cost of energy.”
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Economists are predicting that the total impact of the OBBB for 2026 could boost GDP by 0.9%. The Congressional Budget Office (CBO) and Federal Reserve predicted GDP growth of 1.8% and 1.6%, respectively, before the OBBB. This was before the Q3 GDP number of 3.8% dropped. How that impacts the CBO and Fed’s weak numbers isn’t known, but they will no doubt be revised upward.
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