US economy shows momentum but risks continue heading into 2026

WASHINGTON (TNND) — The American economy has continued to chug along during a year of uncertainties from erratic trade policies and continued struggles with higher prices that have frustrated consumers having a harder time keeping up.

Whether that momentum will continue into 2026 is an open question as the economy faces unknowns on the future of tariff policy as the Supreme Court nears a decision on them, questions about the independence of the Federal Reserve, volatile energy prices and geopolitical dangers. Consumers outside of the top earners are also showing signs of stress, raising questions about whether they will continue to open their wallets.

The U.S. economy grew at the fastest rate in two years during the third quarter at a 4.4% annual pace, a jump from 3.8% in the April to June quarter. Strong consumer spending was the primary driver of the growth along with a surge in exports and business investments.

Economists are expecting a strong fourth quarter once the Commerce Department releases the initial figures next month thanks to continued spending for the holidays. The Federal Reserve Bank of Atlanta’s GDPNow tool is forecasting a 5.4% increase to wrap up 2025.

Despite avoiding the worst-case scenarios that were initially feared as a result of President Donald Trump’s massive increase in tariffs, many Americans are still deeply unsatisfied with the state of the economy. Those frustrations are primarily driven by inflation that has not returned to the Federal Reserve’s target of 2% but also reflect a stalled labor market that is forcing more households to dip into savings and rely on credit to get by.

Job creation has sputtered since the first quarter, with employers adding just 28,000 jobs a month since March. Most of the jobs being added are focused on a handful of industries like healthcare and social assistance, while manufacturing and goods producers have shed jobs or are stuck in place. The unemployment rate has been contained at 4.4%, showing that companies are hanging onto workers instead of announcing layoffs.

“It’s low hire and low fire, and what that means is that people are scared, there’s so much uncertainty, that they’re holding steady. They’re not going to take a risk and start that business they’ve always wanted to. They’re not going to jump ship at a better opportunity,” said Ryan Young, senior economist at the Competitive Enterprise Institute. “The one area that is seeing a lot of job growth is health care, and a lot of that’s because health care is a safe-harbor sector.”

A slowed labor market also puts downward pressure on wages, shrinking the gap between income increases and the pace of inflation, squeezing budgets further and forcing households to cut back.

Consumer spending that accounts for 70% of U.S. economic activity is being increasingly driven by high-income households who are enjoying gains from stock holdings and other investments, while lower- and middle-class consumers are having to cut back to stay afloat. A Bank of America Institute report published in December found spending from the top third of the income spectrum climbed 4% over the year into November, while spending from the lowest third was up less than 1%.

Signs of stress outside the top earners are mounting with an increasing share of Americans who are turning to credit cards to cover expenses and carrying balances for longer. A Bankrate survey found nearly half of American consumers with a credit card carry a balance, and 61% of them have been in credit card debt for at least a year.

Personal savings rates also steadily declined throughout 2025, falling to 3.5% in November, compared to 5.5% in April.

“Even though consumer spending is up and staying strong, savings are going down, and that’s not sustainable. When both savings and investment are going down, that’s bad for future growth and people already have serious debt problems as it is — neither of those is healthy going forward,” Young said.

Progress on getting inflation in check has stalled near 3%. Data from Fed’s preferred inflation gauge released on Thursday showed prices were 2.8% higher in November compared to the year prior, the most recent data available. While down considerably from the COVID-era highs, prices are 25% higher than they were before the pandemic.

The stubbornness of inflation has been a struggle for the Fed to get a handle of and squeezed many households to the brink. Fed officials are trying to strike a delicate balance with interest rates while inflation is running warmer than they’d like and concerns about the stability of the labor market mount.

Fed chair Jerome Powell and other officials are under immense pressure from Trump and the White House to cut rates that make it cheaper to borrow money. But Powell and others have been hesitant to lower the benchmark rate while the economy has grown at a solid pace until they see more progress on inflation.