A year ago, businesses, especially CEOs, were optimistic about the U.S. economy in 2025, expecting tax cuts and more pro-market policies from President-elect Donald Trump. And then came April 2nd, Liberation Day. Markets fell, uncertainty increased, and affordability became a more serious concern. Meanwhile, the labor market remained depressed as immigration restrictions slowed labor force growth and created labor shortages in some sectors.
Nevertheless, the US economy persisted. The market is up more than 15% as the year draws to a close, and third-quarter GDP growth was an unexpectedly strong 4.3%. What will happen in 2026? There are reasons to be optimistic, as were many a year ago. Here are five of them.
Consumers get more money. Treasury Secretary Scott Bessent said he expects Americans to receive up to $150 billion in tax refunds early next year as a result of the budget law the president signed last summer. With the exception of those who receive tip income, higher income earners who spend a smaller percentage of their income will feel the impact more. Nevertheless, the Congressional Budget Office expects the tax cuts to increase demand and labor supply next year. President Trump also said he would send $2,000 checks to most households next year to ease affordability concerns. Perhaps this should be taken with a grain of salt, but the overall direction of tax policy is to increase consumer spending and confidence.
get money back from the government
About two-thirds of U.S. taxpayers receive a refund each year, and next year could be unusually large.
Businesses get more money. Another provision of this budget law allows businesses to deduct 100% of the year’s equipment purchases. After the passage of the 2017 tax law, there is evidence that similar rules and corporate tax cuts boosted investment by 11% and boosted GDP by nearly 1%. However, the percentage of expenses that businesses can deduct has declined since the original law was passed, and there was uncertainty about what would happen in the future. This new provision is expected to increase capital spending and growth over the next year.
How much of those expenses can be deducted?
In the 2017 Budget Act, the 100% deduction for capital expenditures was scheduled to be phased out by 2027, but the 2025 Budget Act reinstates it.
Interest rates will be lower. It is unclear whether Fed Chair Jerome Powell will cut rates further, but it is almost certain that the new Fed chair, who will take office in May, will do so. It is also likely that the central bank will expand its purchases of Treasury bonds, further easing credit concerns.
This line is likely to fall
Interest rates have been flat or falling for the past two years, and a majority expect them to fall further in 2026.
Energy can become cheaper. CBO predicts that tax provisions that encourage increased oil and gas production will also have a positive impact on GDP next year. As some regulations are temporary, we expect the impact to be even greater in the coming years, but it is not inconceivable that increased energy supplies could reduce energy costs.
As production increases, prices may fall
The price of a barrel of oil has not yet returned to its pre-pandemic lows, but new rules to encourage production could change that.
There will be more certainty about tariffs. Perhaps this is the triumph of hope over experience. That said, it would be difficult to see policy stability decline to the extent it has this year. The high tariffs announced on Liberation Day not only shocked the market, but the constant uncertainty about what the tariffs would be and what they would apply to caused economic damage and likely contributed to higher inflation. The deal is now in effect and the question of legality will be resolved one way or another.
flagship year of tariffs
Taxes on imported goods fell slightly in May after spiking in April, but remain at historically high levels.
Add all this up and there are reasons to be bullish about 2026. The impact of the budget law alone is expected to boost GDP by 0.9% next year.
There is reason to be concerned about 2026 and beyond. All of these stimuli can cause elevated blood sugar levels, and America has learned once again how dangerous they can be during the pandemic. Rebate checks, tax cuts, and lower interest rates risk causing higher inflation, which could hit American household budgets hard and destabilize expectations, further entrenching inflation. It could take years for the Fed to rebuild its credibility and ability to influence inflation. There is also the problem of increasing national debt, and this law will contribute to that problem. This could cause long-term interest rates to rise, ultimately putting pressure on consumer spending.
But these are questions for another year and another column.
This column reflects the author’s personal views and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
