AI investment and the labor market
Artificial intelligence is set to remain one of the most closely watched forces in the U.S. economy in 2026. Key questions include whether warnings about AI-driven job losses will begin to materialize and whether productivity gains move from anecdotal evidence into official economic data.
So far, AI has appeared to play only a marginal role in recent labor market slowing. Some economists and policymakers argue that broader adoption could even support employment in the short term. AI-related investment boosted economic growth during much of 2025 and has helped lift equity markets, potentially supporting consumer spending among higher-income households.
Concerns about an AI investment bubble persist, particularly as financial regulations are loosened, but any major correction is widely seen as a longer-term risk rather than an immediate threat in 2026.
Tax cuts deliver peak economic impact
The One Big, Beautiful Bill Act, signed into law in July, is expected to deliver its strongest economic stimulus in the early months of 2026. Fiscal policy is projected to add roughly 2.3 percentage points to first-quarter GDP growth.
On the household side, measures such as deductions for tip income, Social Security payments, and expanded state and local tax deductions are likely to generate larger-than-usual tax refunds. Corporations are benefiting from new incentives for capital investment, particularly in manufacturing facilities. At the same time, federal spending on immigration enforcement is increasing under the legislation.
Trade policy and legal uncertainty
Trade remains a key source of uncertainty as the Supreme Court prepares to rule on the president’s authority to impose tariffs unilaterally. A decision limiting that power could disrupt tariff-based revenue assumptions and potentially trigger complex refund processes.
At the same time, a ruling could establish clearer legal boundaries, leading to a more stable trade environment, albeit one with higher tariff levels than before 2025. Other legal avenues remain available to impose tariffs, though they involve more structured and slower processes.
Leadership transition at the Federal Reserve
The term of Federal Reserve Chair Jerome Powell ends in May, and a leadership change is imminent. The next chair will face significant political pressure to lower interest rates despite persistent inflation, raising questions about the central bank’s independence.
Financial markets will closely assess whether the new leadership can maintain credibility. A perceived loss of independence could undermine confidence in the Fed’s willingness to act against inflation, potentially pushing long-term interest rates higher.
Affordability pressures and electoral politics
With midterm elections approaching in November, the cost of living is emerging as a central political issue. While annual inflation has moderated to 2.7%, prices remain substantially higher than in early 2021, with overall consumer prices up 23.7% and grocery prices rising even more.
The administration has shown sensitivity to price pressures, quietly shelving plans to impose tariffs on consumer goods such as pasta and furniture. The move suggests an effort to avoid measures that would directly raise prices for households as voters head to the polls.
