The "One Big Beautiful Bill Act" front-loads tax cuts, boosting consumer income and GDP in 2026. However, its spending cuts are delayed until later in the decade, meaning the bill will become a drag on economic growth in subsequent years as those austerity measures take effect.
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A contrarian view suggests a new political administration might deliberately implement growth-negative policies at the start of a term. This strategy, likened to a new CEO "kitchen sinking" results, clears the deck and establishes a low baseline, making subsequent growth appear more robust.
Policies designed to avoid economic downturns at all costs can lead to significant long-term risks. Capital and labor become trapped in inefficient companies that would otherwise fail, hindering productivity growth and creating a less dynamic economy.
The sharp drop in the fiscal impulse represents a direct, dollar-for-dollar hit to nominal GDP that has already occurred. This indicates a recession is underway, not forthcoming. The National Bureau of Economic Analysis (NBER) will likely backdate the start of this recession to the third quarter of 2025.
While election-year fiscal stimulus may boost 2026 growth, it sets the stage for a potential inflation problem in 2027. The combination of lagged effects from the stimulus, tariffs, and restrictive immigration could cause overheating. Due to policy lags, the consequences won't be fully felt until after the election year.
The outlook for 2026 is significantly more optimistic than 2025, primarily due to fiscal policy. Deficit-financed tax cuts are expected to add nearly half a percentage point to GDP growth. This stimulus, not AI, is seen as the main force lifting the economy from below-potential to at-potential growth.
Economist Arthur Laffer argues that debt is merely a tool. Debt used for productive investments that generate high returns (e.g., Reagan's tax cuts to spur growth) can be beneficial. In contrast, debt used for non-productive purposes (e.g., paying people not to work) is destructive to the economy.
Large, ongoing fiscal deficits are now the primary driver of the U.S. economy, a factor many macro analysts are missing. This sustained government spending creates a higher floor for economic activity and asset prices, rendering traditional monetary policy indicators less effective and making the economy behave more like a fiscally dominant state.
The 2026 US economic forecast is not a simple slowdown but a tale of two halves. A weaker first half is expected due to lingering effects of tariffs and policy. A recovery is projected for the second half as spending remains resilient and the economy adjusts.
J.P. Morgan highlights a confluence of factors in 2026 that could create significant inflationary pressure. These include planned tax cuts, major national events like the FIFA World Cup and America's 250th birthday, and potential shifts in immigration policy, creating a powerful fiscal tailwind.
A government can artificially inflate its jobs numbers and GDP by going on a hiring spree for bureaucratic roles. This growth is illusory, or "phantom," as it's funded by printing money and doesn't contribute to the productive economy. It creates positive short-term metrics but fosters long-term inefficiency.
