The New Yorker
The Biggest Threat to the 2026 Economy Is Still Donald Trump
Many
analysts are predicting an election-year upturn, but they aren’t
accounting for the President’s ability to cause more chaos.
Source photograph by Alex Wong / Getty
In a prime-time address from the Oval Office last week, Donald Trump said, “We are poised for an economic boom the likes of which the world has never seen.” This was the sort of bloviating that has convinced many voters he’s hopelessly out of touch, but it did raise the question of how the economy is likely to perform in 2026, a midterm-election year. Given the data fog that the government shutdown created, the old joke applies more than ever: it’s difficult to make predictions, especially about the future. But some things seem reasonably clear.
Right now, the economy is working in the Democrats’ favor. Concerns about affordability have refused to abate: the latest weekly poll by YouGov/The Economist indicates that Americans still consider “inflation/prices” to be the most important policy issue, and just a third of them approve of how Trump is handling it. Meanwhile, it looks like G.D.P. growth for 2025 will come in at about two per cent—one percentage point lower than it was in the last two years of the Biden Administration—and the unemployment rate is ticking up. When Joe Biden left office, it was four per cent; now it is 4.6 per cent.
Still, November is a long way away, and observers outside the Oval Office, including Jerome Powell and his colleagues at the Fed, have been raising their estimates of how the economy might perform in the New Year. “Fiscal policy is going to be supportive. And, as I mentioned, A.I. spending will continue,” Powell said at a press conference earlier this month. “The consumer continues to spend. So, it looks like the baseline will be solid growth next year.” Many economists on Wall Street concur. In releasing its global outlook for 2026 last week, Goldman Sachs upped its prediction for U.S. growth to 2.6 per cent: “The US is likely to outperform substantially . . . because of reduced tariff drag, tax cuts, and easier financial conditions.”
The A.I. boom certainly can’t be dismissed. According to analysts at Barclays, about half of all the G.D.P. growth in 2025 stemmed from “spending on data centers, chips, power grids, networking equipment and other AI-related capital expenditure.” Going into 2026, corporate investment in A.I. shows no signs of slacking. The Fed likely isn’t done cutting interest rates, and come next April and beyond, tax refunds stemming from the budget-busting One Big Beautiful Bill Act will also be material: according to the Tax Foundation, they will average about three hundred to a thousand dollars more than usual per household. Other things being equal, the refunds will likely give a boost to consumer spending.
With Trump in the Oval Office, however, other things are rarely equal. Disruption is his essence. A big reason for G.D.P. growth slowing this year and prices remaining stubbornly high is that Trump’s ever-changing tariff policies created an enormous amount of uncertainty and raised the cost of imported goods. When economists talk of tariff relief, they are assuming that things will be more settled in 2026—but will they? Some businesses are still in the process of passing along the tariff hikes to consumers. The Supreme Court could well rule that Trump’s blanket levies, which he introduced using emergency powers, are illegal, but that wouldn’t necessarily be the end of them. The Administration would surely try to rejigger the levies using different legal authorities, which create another round of anxiety and uncertainty for businesses, particularly small businesses.
The escalating trade war with China is currently on something of a hiatus. In October, the Trump Administration eased tensions by reversing its decision to expand the list of Chinese companies restricted from access to advanced U.S. technology. Earlier this month, Trump said he would allow Nvidia to export to China some high-grade computer chips, with the U.S. government collecting twenty-five per cent of the revenues. Wall Street seems to be tacitly assuming that the détente will last beyond Trump’s trip to China scheduled for April, but who really knows? If the government in Beijing doesn’t agree to the concessions that he wants, he could easily revert to a more coercive stance.
Even if the economy can endure another year of the Tariff Man, there are other issues that could have a big political effect. They include jobs, prices, and health-care costs. Since April, growth in employment has averaged just forty thousand jobs a month. Last year, the figure was more than four times larger. Moreover, Powell said the Fed thinks the official monthly payroll figures are overestimating the actual numbers by about sixty thousand. If that’s right, the economy has been shedding twenty thousand jobs a month. Even going by the official figures, the number of people working in manufacturing, the sector which is supposed to be the primary beneficiary of Trump’s tariffs, has fallen by sixty-three thousand this year. Other industries that have recently displayed weak hiring are information and finance, which employ a lot of white-collar workers. This has provoked fears that A.I. is eliminating jobs. In a Reuters/Ipsos poll, seventy-one per cent of respondents said they were concerned that A.I. will be “putting too many people of out of work permanently.”
Trump can’t be blamed for A.I., although the executive order that he issued two weeks ago in an effort to prevent states from regulating the potentially transformative new technology demonstrated how beholden he is to the Silicon Valley tech barons.
He is more directly responsible for stubbornly high prices. His tariffs have helped raise the prices of many imported goods, including grocery staples such as coffee and bananas, and his mass deportations may be producing a labor shortage in some service industries, such as restaurants and hospitality, where there were almost a million job openings in the fall. When firms are struggling to find the workers they need, they have to offer higher wages, which raises their costs.
As the midterms approach, Democrats will surely heed Barack Obama’s advice to focus on affordability, jobs, and health care. With Congress having adjourned without addressing the year-end expiry of enhanced subsidies for health-insurance policies purchased through Obamacare exchanges, some twenty-two million Americans will be affected. Going into 2026, many of them could face much higher premiums, more than double in some instances. With Republicans divided, and Trump still doing little more than publicly bashing Obamacare, there is no assurance of any resolution.
Meanwhile, Trump’s presence in the White House is accentuating another big threat to the economy, which comes from financial fragility. Over the past three years, the S. & P. 500 has risen by more than seventy-five per cent, and the Nasdaq has more than doubled. Relative to earnings, stocks are trading at very high levels, historically speaking, and investors are borrowing record amounts of money to buy these stocks. On the basis of optimistic assumptions for revenues and profits, A.I.-related companies are raising enormous sums of money, in many cases from one another. And despite the revenues from Trump’s tariffs, the U.S. government is running a budget deficit of close to six per cent of G.D.P.
Whether one categorizes this situation as a financial boom or a bubble is largely a matter of terminology. The key point is that the financial system is vulnerable to unexpected disruptions, and, as the Bank of England recently noted, the risks are rising. Conceivably, a shock could emerge from the A.I. complex, or from the private-credit sector—where hedge funds, private-equity firms, and other non-bank lenders have been expanding their lending very rapidly—or from Trump himself, as he moves to extend his power over the Fed, an institution whose independence many investors, here and abroad, regard as the primary guarantor of financial stability. Powell’s term as Fed chair ends in May, and Trump is set to announce a replacement early in the New Year. Kevin Hassett, who heads the National Economic Council at the White House, and frequently appears on television defending Trump’s policies, is the favorite to get the job—despite rumblings on Wall Street that he would be too much of a patsy.
Trump’s takeover may not end there. In theory, Powell could remain on the board of the Fed after he is replaced as its head: his term as an ordinary governor runs until January, 2028. But, depending on what Powell decides to do, and on how the Supreme Court rules on the President’s effort to fire one of his colleagues, Lisa Cook, on contrived pretenses, Trump appointees could soon occupy five of the seven seats on the Fed board, including the chair. Even then, they would be two short of a majority on the interest-setting Federal Open Market Committee, on which five regional reserve-bank presidents can also cast votes. But faith in the Fed, and the dollar, could easily be undermined, especially if Trump resumes his calls for a key interest rate to be reduced to one per cent. (Yes, one per cent.)
It may not come to that. Trump keeps a close eye on the markets, and earlier this year the preëminent financier in the country, Jamie Dimon, the head of JPMorgan Chase, issued a public warning that “playing around with the Fed could have adverse consequences, the absolute opposite of what you might be hoping for.” But with Trump, you never know for sure. One of the revelations in interviews that his chief of staff, Susie Wiles, recently gave to Vanity Fair was that, back in April, she and J. D. Vance, the Vice-President, tried to talk Trump out of announcing his “Liberation Day” tariffs. He went ahead anyway.
Republicans up for reëlection will be hoping that the Trump-induced economic turbulence is over. It seems unlikely. ♦