The common description of the 2025 economy as "resilient" is challenged. An economy growing below its potential, leading to rising unemployment and no net job growth, is better described as "fragile." This state is unsustainable and risks devolving into a recession if conditions do not improve.
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.
The primary macroeconomic impact of AI in 2025 was not from supply-side productivity improvements but from demand-side wealth effects. A surge in AI-related stock values boosted the economy. The sustainability of this boost in 2026 depends on whether actual productivity gains materialize to justify high valuations.
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.
In 2025, economic forecasts were incredibly accurate on monthly job growth (predicting 124K vs. an actual 125K) but significantly missed the stock market's performance, predicting a 10% gain versus the actual 15%. This highlights the disparity in predictability between fundamental economic data and sentiment-driven financial markets.
Stock market investors are pricing in rapid, significant productivity gains from AI to justify high valuations. This sets up a binary outcome: either investors are correct, leading to massive productivity growth that could disrupt the job market, or they are wrong, resulting in a painful stock market correction when those gains fail to materialize.
The US economy is currently experiencing near-zero job growth despite typical 2% productivity gains. A significant increase in productivity driven by AI, without a corresponding surge in economic output, could paradoxically lead to outright job losses. This creates a scenario where positive productivity news could have negative employment consequences.