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The economic outlook defies the slowdown narrative so common these days. A job boom is not in the cards, but solid growth is the most likely path for 2026. After that, the United States will probably enjoy moderate gains in economic activity.

The economy showed strong growth in the most recent data on gross domestic product. GDP is our broadest measure and thus deserves our closest attention. In the third quarters, the inflation-adjusted growth rate rose to 4.3%. The average gain since 2000 has been 2.2%, so we were well above average. Fourth quarter GDP might be softer because of the government shutdown, but so far the data are coming in hot. The Atlanta Federal Reserve Bank tracks incoming components of GDP. Based on this partial data, fourth quarter looks like a 5.1% increase. (Their estimate is updated with every data release, and they caution that it’s not a forecast.)

Layoff announcements worried many analysts, and 2025 certainly exceeded anything since the pandemic. But December’s announcements were very low. Actual filings to start receiving unemployment insurance benefits are very low—we’re in a layoff drought right now. The flip side, though, is that hiring is also quite low.

Demographics dictate low job growth. The home-grown population of working age is about level. Job gains in recent years have come from immigrants. But with the Trump administration clamping down on entry and increasing deportations, net immigration into the country is very low. 2025 saw the least job growth since the pandemic, but likely also the lowest increase in the working-age population.

With low immigration, the unemployment rate should provide a good look at how the job market is doing. At 4.4% in December, it’s up 0.3 percentage points in the past 12 months. But this information comes from a telephone survey, which is then extrapolated to the total population. Fewer people are answering telephone surveys in general. Immigrants are much less likely to take a government survey call now, so we may be missing a high-employment segment of the population. And extrapolation to the entire population is difficult without accurate data on just how many people have entered and left the country. Official estimates show about zero net immigration in 2020 (the last year of the first Trump administration and also the year of the pandemic), rising to nearly three million in 2024 (the last year of the Biden administration). Last year’s population estimate has not yet been released, but it very likely will come in closer to zero than to three million people.

Total output is the product of the labor exerted and its productivity—output per hour worked. Productivity’s trend growth has been about two percent per year. Artificial intelligence will boost productivity, but it’s rollout has been gradual so far. Programmers and customer service staff are more productive per hour worked, and we have isolated gains in many other industries. But we do not yet see enough AI-driven productivity growth to move the aggregate economy much.

So the supply side constrains our growth potential.

On the demand side, consumers have income and show a willingness to spend it. Pessimists talk about a K-shaped economy, with some people’s incomes increasing (the rising portion of the letter), while others have declining income (the downward-sloping portion). The data show that low-income workers have actually, on average, received pay raises in excess of inflation. Taken as a whole, the past six years have seen lower-paid workers receive larger raises than others. With their incomes up more than inflation, there’s no reason for pessimism on their account.

Businesses have been spending more for equipment and development of intellectual property. They have been doing much less construction, even with data centers added into the picture. Still, their total capital expenditures have increased.

Government spending has also grown, as has net exports, so the demand side looks good going forward.

The evidence discussed so far is retrospective. But the economy normally grows. Productivity—output per hour worked—has a long history of improving, which fuels spending capacity for the overall economy. Labor productivity gains turn into wage gains, as companies compete for workers. To tell a slowdown story, one needs a change. The slower immigration into the U.S. is one such change that must be accounted for, but it’s not going to send the economy into recession.

Federal Reserve policy is nearly neutral. The neutral interest rate, dubbed R* (r-star) by us economists, is never seen directly but instead estimated from historical relationships. Most likely it is slightly contractionary, but not hugely so. The Fed seems not inclined to further interest rate cuts given the stubborn inflation rate. Thus monetary policy will likely have little impact on economic changes in the coming year.

Tariffs have not yet shown up in domestic prices, though they seem likely to in 2026 and beyond. The tariff impact on domestic manufacturers of more expensive raw and intermediate materials will be negative, but only slightly so relative to the entire economy, which is includes substantial service activity.

Business plans based on 2025 averages will work well for most companies in 2026. All organizations (including non-profits and local governments) should sketch out contingency plans for alternative economic environments. Most important is the recession plan, focused on how to pay the bills if revenue drops. Also valuable is an upside contingency plan, outlining how to serve more customers if demand increases.

Doom and gloom always sells better than Pollyanna—but Pollyanna turns out to be more accurate, on average, in the long run. So plan on good times, while protecting your organization from the worst consequences if doom, or gloom, come along.

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