Last year’s odd economy in five charts, and what to watch for in 2026

The U.S. economy presented a puzzling picture in 2025, marked by contradictory indicators that have left economists and policymakers uncertain about the future direction of American financial health.

While the economy demonstrated robust growth, particularly in the third quarter when it reached a 4.3% annual pace—the strongest in two years—the labor market told a different story. Hiring remained sluggish throughout the year, with the economy actually shedding jobs in June, August, and October. The unemployment rate climbed steadily from 4% in January to 4.6% by November, reaching its highest point in four years.

This disconnect between economic growth and employment has sparked debate about whether 2026 will see the job market catch up to overall economic expansion, or if America is experiencing what some economists call a “jobless expansion”—where output increases without corresponding employment gains.

“2026 begins at a time when it is hard to say how 2025 ended,” noted Stephen Stanley, chief economist at investment bank Santander. The six-week government shutdown last fall significantly disrupted the collection and publication of economic data, leaving Federal Reserve officials with an incomplete view of economic conditions.

The rise of artificial intelligence appears to be playing a significant role in the employment picture. Federal Reserve governor Christopher Waller highlighted this trend, saying, “AI, AI, AI, AI—that is all I have heard since this summer,” referring to conversations with business leaders explaining their reluctance to hire new workers. Companies are increasingly able to boost productivity without expanding their workforce, potentially fundamentally altering traditional employment patterns.

Trump’s tariff policies created additional economic turbulence throughout 2025. The year began with businesses rushing to import goods ahead of new duties, causing the economy to contract in the first quarter. The subsequent uncertainty—as tariffs were imposed, lowered, removed, and delayed—led many companies to put hiring plans on hold, contributing to what economists describe as a “low-hire, low-fire” job market.

Despite these challenges, there were signs of improvement toward year’s end. Excluding government employment, which saw significant cuts due to the Trump administration’s public sector purge, businesses added an average of 75,000 jobs monthly in the three months ending in November—a substantial increase from just 13,000 in the three months ending in August.

Inflation remained a persistent economic concern in 2025. After falling sharply in 2023 and 2024 from four-decade highs, progress stalled last year. The Federal Reserve’s preferred inflation measure actually increased to 2.8% in September from 2.7% at the end of 2024.

Rising costs became a potent political issue in various state and local elections. Trump faced increasing criticism over “affordability” concerns, which he controversially dismissed as a “hoax.” While November showed some cooling in the consumer price index, economists warned these figures were likely distorted by the government shutdown, as data collection occurred primarily after the shutdown ended when holiday discounts were more prevalent.

Economic inequality continued to shape spending patterns, with wealthier households accounting for a growing share of consumer activity. This has created what many economists term a “K-shaped economy,” where aggregate growth figures mask underlying weaknesses among lower-income Americans.

Looking ahead to 2026, Stanley and other economists maintain cautious optimism. They anticipate that hiring may accelerate, supported by stronger growth fueled by substantial tax refunds—a result of Trump’s tax cut legislation—and reduced uncertainty around tariffs. Most experts predict inflation will gradually cool throughout 2026, moving closer to the Federal Reserve’s 2% target, though some worry early-year price adjustments and tariff costs could temporarily push inflation higher.

As December’s employment figures prepare for release on January 9, all eyes will be on whether the late-2025 improvement in hiring will continue into the new year, potentially resolving some of the contradictions that defined the American economy in 2025.