State of the economy at the end of 2026

The Federal Reserve's SEP outlines key economic forecasts for Q4 2025. The Federal Open Market Committee's (FOMC) September 2025 Summary of Economic Projections (SEP) provides median participant forecasts for key economic indicators in the fourth quarter of 2025 ^[1]. The SEP typically presents core Personal Consumption Expenditures (PCE) inflation as an annualized percentage change from the fourth quarter of the prior year to the fourth quarter of the current year (Q4/Q4) ^[1].

Median projections for core PCE inflation and unemployment are 2.1% and 4.0%. For the fourth quarter of 2025, the median FOMC participant projects a core PCE inflation rate of 2.1% on a Q4/Q4 annualized basis ^[1]. Concurrently, the median projection for the U3 unemployment rate for the same period is 4.0% ^[1]. These collective projections reflect the central tendency of FOMC participants' views on these crucial economic indicators, which are fundamental to their monetary policy deliberations and overall economic strategy ^[2].

New policies could significantly increase the FY2026 federal budget deficit. The Congressional Budget Office's (CBO) January 2025 baseline projected the federal budget deficit for fiscal year 2026 (FY2026) to be approximately 5.8 percent of the Gross Domestic Product (GDP), under current law which assumes the expiration of certain 2017 tax cuts ^[1]. However, the enacted tax and spending policies of a new administration and Congress are expected to significantly alter this outlook. A major legislative package, referred to as the "OBBBA megabill," likely encompassing the extension of expiring individual provisions of the 2017 tax cuts ^[3] and potentially new spending, is estimated to add $4.7 trillion to the deficit over the 2026-2035 period ^[2]. Specifically for FY2026, these new policies are projected to increase the deficit by approximately $550 billion ^[2]. Given CBO's projected GDP for FY2026 of roughly $29.5 trillion ^[1], this additional cost translates to an expected increase of about 1.9 percentage points of GDP.

The proposed policies are projected to stimulate aggregate demand, though with risks. This substantial increase in the deficit, primarily driven by tax cuts and potentially increased spending, implies a significant fiscal stimulus for the economy. By reducing the tax burden on households and businesses and possibly increasing government outlays, these policies are designed to boost disposable income, encourage consumer spending, and stimulate business investment ^[3]. Consequently, this expansionary fiscal stance is expected to increase aggregate demand in the short term, leading to higher economic growth and potentially aiding job creation. However, such a large-scale fiscal expansion also carries implications for inflation and interest rates, and it would exacerbate the nation's long-term debt trajectory.

AI's broad impact on productivity is not yet evident in data. Evidence for a widespread, structural productivity boom from artificial intelligence has not yet clearly materialized in economic data, with gains frequently concentrated and prioritizing growth over immediate productivity improvements ^[3]. Many CEOs indicate that AI is not significantly affecting productivity or employment ^[4]. Research shows that three-quarters of AI's economic gains are captured by only 20% of companies, with leading firms often prioritizing growth initiatives rather than direct productivity enhancements during AI implementation ^[1]. This suggests it is premature to conclude that an AI-driven productivity boom is underway based on current information ^[3].

Morgan Stanley forecasts U.S. productivity growth will exceed historical averages. Regarding future projections, Morgan Stanley anticipates a reacceleration of productivity growth, forecasting U.S. nonfarm productivity growth to reach 2.0% in 2026 ^[2]. This anticipated rate surpasses the 2000-2019 average U.S. nonfarm productivity growth of approximately 1.5% ^[2]. Morgan Stanley labels this outlook a "productivity surprise" ^[5]. A specific annualized nonfarm productivity growth forecast for H1 2026 from Goldman Sachs was not available within the provided research sources.

US consumer balance sheets demonstrate sustained resilience against economic pressures. The US consumer's balance sheet is widely regarded as resilient, maintaining strength despite various economic pressures ^[1]. Fitch Ratings, in a January 2026 report, projects that US consumers will "remain resilient" even in the face of an anticipated weakening labor market ^[1]. This sustained financial fortitude is also observed among the middle class, where financial resilience persists despite ongoing cost pressures ^[3]. Overall, the consensus from these reports points to a robust capacity for households to manage financial obligations.

The Federal Reserve regularly reports household debt service ratios. The trajectory of the household debt service ratio (DSR) as a percentage of disposable personal income is a key indicator of consumer financial health. This ratio is published by the Federal Reserve as part of the Financial Accounts of the United States (Z.1) report ^[2] and through specific household debt service ratio releases ^[4]. Additionally, the Federal Reserve Bank of St. Louis's FRED database tracks this series (TDSP) ^[5]. While these sources provide comprehensive and up-to-date data, the specific current level and detailed historical trajectory are published within the reports themselves and are not extractable from the provided source titles.

Fitch Ratings anticipates consumer resilience, not a spike in delinquencies. Regarding predictions for significant spikes in 90+ day delinquencies for auto and credit card loans, Fitch Ratings' perspective as of January 2026 indicates continued consumer resilience ^[1]. Their assessment, "US consumers will remain resilient despite weakening labor market," implies that Fitch does not anticipate a significant spike in delinquencies that would undermine the overall strength of consumer balance sheets ^[1]. While the provided sources do not detail specific predictive models or define the exact thresholds at which Fitch would predict such a "significant spike," Fitch's overall outlook points towards stability rather than a sharp deterioration in loan performance ^[1].

Geopolitical instability is the main external risk to energy markets. This instability presents the potential for substantial supply shocks ^[1]. The market explicitly considers scenarios such as "navigating the $112 Geopolitical Super-Spike" for WTI crude oil by April 2026, indicating awareness of extreme price potential ^[1]. While current WTI and Brent prices are rallying due to tight immediate supply, the forward curve simultaneously signals underlying "long-term risks" for future prices ^[3].

Conflicting signals define the 2026 WTI futures market. Analysis of the WTI crude oil futures curve reveals both an "explosive $97 breakout" suggesting upward momentum ^[4] and a "deep contango" that points to these "long-term risks" ^[3]. However, the WTI crude oil options skew has reached a four-year high, a strong indicator that market participants are pricing in significant upside risk for crude. This elevated skew reflects a collective demand for call options, positioning for higher prices ^[2].

A sustained price surge above $110 appears highly probable. The four-year high in the options skew for upside risk strongly suggests market participants perceive a significant chance of a supply shock causing a sustained price increase above $110/barrel for over a quarter during the 2025-2026 period ^[2]. This outlook is further reinforced by the explicit mention of a "$112 Geopolitical Super-Spike" for April 2026, highlighting that a sustained move above $110/barrel is a key risk factor being anticipated due to geopolitical considerations ^[1].