US Economy Faces Tariff Pressures and Labor Challenges in Early 2026

Recent Economic Slowdown Amid Government Shutdown

Growth in the US economy likely continued through the final three months of 2025, but a government shutdown reduced output by about one percentage point, according to economists' forecasts.[1]

Hiring remained weak despite the pickup in growth, with job gains weakening after President Trump's sweeping tariffs announced in early April 2025, dubbed "Liberation Day."[1]

The economy shed jobs in June, August, and October 2025, pushing the unemployment rate from 4% in January to 4.6% in November—the highest in four years.[1]

December 2025 job figures are set for release on January 9, 2026, providing further insight into labor market trends.[1]

Inflation Stays Elevated with Tariff Impacts

Inflation showed little improvement in 2025, with the Federal Reserve's preferred measure rising to 2.8% in September from 2.7% in December 2024.[1]

Economists anticipate potential worsening in early 2026 as companies pass on tariff costs through annual price changes, though most expect a gradual cool-down toward the Fed's 2% target later in the year.[1][2]

Federal Reserve Governor Christopher Waller expressed optimism last month, stating 2026 "could turn out to be a better year," hoping stronger growth pulls the labor market along.[1]

Tariffs Distort Growth and Imports

Trump's tariffs caused a surge in imports during the first quarter of 2025, leading to economic contraction as businesses stockpiled goods ahead of duties.[1]

Philadelphia Fed analysis suggests tariff-induced price adjustments will primarily affect goods in the first half of 2026, with goods inflation expected to align with overall 2% inflation by the second half.[2]

• Key projection: Price level shift from tariffs, not sustained inflation.
• Timeline: Adjustments complete by mid-2026.

Labor Market and Productivity Signals

Despite robust Q3 2025 GDP growth, employment weakened, raising questions about underlying trends.[2]

Possible explanations include a step-up in productivity growth driven by AI and deregulation, with initial investments in data centers requiring fewer workers.[2]

Philadelphia Fed outlook sees labor market risks elevated but baseline stable: inflation moderating, unemployment stabilizing, and growth around 2% for 2026.[2]

Optimism from Tax Refunds and Policy Clarity

Economists like Stanley expect hiring to pick up in 2026, fueled by large tax refunds from Trump's tax cut legislation and reduced uncertainty from tariffs.[1]

Residential investment stayed negative amid restrictive monetary policy, while high-tech equipment investment remained strong through Q3 2025.[2]

Fed officials emphasize cautious optimism on inflation and seek clarity on growth-employment divergence as January 2026 data emerges.[2]