In 2025, the U.S. economy remained strong, notwithstanding a surprisingly low 1.4% increase in GDP in the fourth quarter. Woven into the fabric of generally good economic numbers were some disconnects. While the numbers showed a muscular economy compared with 10-year averages, it was experienced as a K-shaped economy—with the higher-end earners thriving, while the other end of the spectrum was struggling.
Projecting the rest of 2026, the economy shows signs of maintaining its strength, with growth pegged at 2% to 3%. But when it comes to consumer spending the disparity between income groups is likely to paint different pictures.
To get insights into the current state of the economy and what 2026 may hold, ProSight heard from:
- John Silvia, former Chief Economist for the Senate Banking Committee and Wells Fargo, and founder of Dynamic Economic Analysis.
- Tom Brown, CEO of Second Curve Capital, a hedge fund serving retired financial services executives, and publisher of the online Tom Brown’s Banking Weekly.
This article is adapted from a ProSight webinar.
A No-Hire, No-Fire Economy
The sectors showing strength in employment numbers include healthcare as well as hospitality and leisure. Contributing to the year’s outlook is low unemployment in what has been described as a static job market—particularly in the transportation, manufacturing, and warehousing sectors. Automation processes—but not AI—are what’s helping to keep employment levels stable, Brown said. “Prospects for future employment aren’t as bright as they might have been several years ago,” he said.
For organizations that are hiring, the question becomes whether to look at candidates’ technology skills versus business experience and knowledge. “People with knowledge of the job are more useful with the deployment of AI tools than people that don’t have any knowledge of the job,” Brown said.
Spending vs. Credit Risk
The workers most likely to feel the effects of unemployment or underemployment are those in the 18- to 29-year-old cohort. How will this group impact overall consumer spending and the credit risk that comes along with their purchases? Silvia said “it is traditionally true that their delinquency rates are higher than for more mature consumers.” Looking back at 2025, there was a significant rise in delinquency rates for both credit cards and auto loans among these younger consumers. With uncertain job prospects, it may be increasingly difficult for them to make purchases and pay off their debts.
Meanwhile, indicators show that the top 60% of income distribution accounts for between 75% and 80% of public spending, Brown said. Data also shows that “the wealthy don’t change their spending pattern as much as the bottom 50%” in a downturn. If the economy cools, “where you’ll see a change [is] for lower income segments, particularly in where that money is being spent—going from discretionary to non-discretionary items,” Brown said.
Fed Rates and Inflation
As economists look back on the fourth quarter of 2025, interest rate cuts don’t appear to have had a major impact. Looking forward, the economists expect strong spending from business equipment to consumer goods. “The Fed isn’t going to feel the need to cut short-term interest rates to either help employment or to lower the rate of inflation,” Brown said.
Fed easing has helped lower one-year and two-year interest rates, but longer-term rates have remained around 4%, with potential for impact on inflation. While the Personal Consumption Expenditures Index is currently at 2.9%, it may increase somewhat over time.
Affordability
Groceries, electricity, and medical care are all impacting the consumer wallet.
The housing sector may offer a more complex picture—with the mortgage market and banks feeling the impact. After a 40-year decline in mortgage rates, they have come off those lows in recent years. That could mean a homeowner with a 3% mortgage may find that a new home, where the mortgage rate will be near 6%, is beyond their budget.
Also pricing out first-time home buyers are higher prices and a lack of affordable new housing inventory. According to a recent Wall Street Journal article, there’s another trend impacting those buyers: “The rapid growth of artificial intelligence and a surge in construction of the large data centers it requires are emerging as another potential contributor to America’s housing shortage,” the piece said, with the centers competing with housing for labor, materials, and land.
Closing Thoughts
Preparing for a successful and profitable 2026 will require keen market knowledge. Where in one area there may be a strong consumer or industrial market for business owners and their bankers, the story may be very different in other cities and states. Silvia noted, for example, that states experiencing hearty third-quarter 2025 job growth included Missouri and New York, while the job count in Florida contracted. Such differences can mold both business and consumer spending and borrowing—whether it’s the price of a new or expanded warehouse or gasoline at the pump or eggs in the supermarket.
