Economic outlook for 2026: Weak start, stronger finish

HIGH POINT – The unknowns that overshadowed the economic outlook for 2025 are still in place heading into 2026 and some new ones, such as the implementation of tariffs under the new Trump administration, are continuing to make clear forecasts about consumer spending, housing and employment difficult to make.

Add to that a 43-day government shutdown that resulted in a pause in critical economic data as the year comes to an end, along with the growing impact of AI on many aspects of business, and it’s easy to see why the uncertainty persists.

The recent UCLA Anderson Forecast describes the scenario as dueling economic trends: one buoyed by investment in AI infrastructure and the rising income of high-wealth households and the other impacted by tariff-induced inflation and a weakening labor market.

The Forecast projects AI-related investments in 2025 had surpassed the estimated $250 billion, reaching $405 million, with even more coming in 2026.

But with tariffs increasing prices and placing pressure on consumers and small businesses, the result, the Forecast noted, has been long-term planning issues that contributed to a more cautious hiring environment.

Creators of the Forecast don’t expect an immediate downturn or resurgence, but rather a soft economy at the start of the year that experiences stronger growth later and into 2027.

Seth Carpenter, chief economist at Morgan Stanley, commenting during an online interview on the global outlook for 2026, also foresees a slowdown in the near term “especially in the fourth quarter of this year and maybe the beginning of next year.”

“But once the economy works its way through the tariffs, maybe some of the lagged effects of monetary policy, we’ll start to see things pick up a bit in the second half of the year,” he said.

Carpenter also believes the Fed, which was poised to make another rate cut in December, has a few more cuts to get through. “By the time we get to the middle of next year … they’re going to have their rate policy down just a little bit above 3%. So roughly where the committee thinks neutral is.”

In its outlook on Fed rate cuts for 2026, researchers at Goldman Sachs said beyond the expected cut in December, the picture is less clear.

Jan Hatzius, chief economist, expects the Fed to pause the cutting cycle in January but deliver them in March and June. One factor that could prompt additional cuts, Hatzius noted, is tied to reduced spending brought on by fewer employment opportunities for college graduates.

“A further deterioration in employment opportunities for this key demographic — perhaps reflecting artificial intelligence and other efficiency-enhancing measures — could have a disproportionate negative impact on consumer spending and prompt further rate cuts over time,” he wrote in the company’s Global Views report.

Unemployment is expected to stay at its current level of 4.4% or rise slightly as a continued focus on productivity, driven in large part by the AI-fueled initiatives, comes into play.

On the spending front, despite the resilience shown by consumers this year, there are issues that could impact growth. Analysts with S&P Global wrote in a recent article that consumer spending should moderate in 2026.

“According to the latest U.S. spending data, aggregate personal consumption expenditures grew at an annualized rate of 3% in third quarter 2025, a higher rate than the first half of the year,” they wrote. “Still, we think an increase in inflation alongside a weakening labor market will erode household purchasing power over the next several quarters, forcing consumers to keep their purse strings tight in the fourth quarter of this year and during most of 2026.”

The estimate for real consumer spending growth from various sources is around 2% to 2.2% for 2026, although Michael Wolf, global economist and senior manager at Deloitte, said while the forecast is for a healthy increase through the end of 2025, spending will slow in 2026 to a 1.4% growth rate as headwinds such as tariffs and elevated interest rates impact spending.

Strategic Insights projects consumer spending on furniture and bedding to grow by 1.9% in 2026 and furniture store sales to increase by a more modest 1.1%.

The most recent Furniture Today Home Furnishings Sentiment Index showed increased optimism among the industry for business over the next six months and higher quarterly sales projections.

Housing: Try, try again

An improved housing market would also be a boon to the furniture industry, which counts on new homeowners to drive a significant portion of business.

Housing pundits said 2025 was going to be the year of the housing market revival, banking on lower mortgage rates to entice new buyers. Interest rates did come down from the 7% range they were at in late 2024 and through the first half of 2025, but they still stayed high enough to keep some new home buyers out of the market.

The National Assn. of Realtors put existing home sales as flat for 2025 and new home sales down by 2%. In contrast, NAR’s prediction for 2026 is for a 14% jump in existing home sales and a more modest 5% increase for new homes. The group is also forecasting mortgage rates around 6% with no return to 3% rates in sight.

“Next year is really the year that we will see a measurable increase in sales,” Lawrence Yun, chief economist at the NAR told attendees of NAR NXT in mid-November.

Economist with Zillow are also predicting an uptick in home sales, although not to the same degree as Yun. Zillow’s outlook is for 4.26 million existing home sales in 2026, which would be a 4.3% increase. The team at Realtor.com has even lower expectations for market growth at 1.7% for existing homes, which would push the total to 4.13 million.

“The housing market is finally settling into a healthier state, with buyers and sellers starting to return,” said Mischa Fisher, chief economist at Zillow. “Buyers are benefiting from more inventory and improved affordability, while sellers are seeing price stability and more consistent demand. Each group should have a bit more breathing room in 2026.”

Zillow’s team also sees mortgage rates staying above 6%, while Realtor.com’s outlook keeps rates flat at 6.3% from the end of 2025 through all of 2026.

Chen Zhao and Daryl Fairweather from Redfin, who see mortgage rates dipping below 6% periodically, but not for an extended period, are calling 2026 “the great housing reset,” which will be characterized by “a yearslong period of gradual increases in home sales and normalization of prices as affordability gradually improves.” Under their scenario, existing home sales rise by 3% to about 4.2 million.

Renting continues to be a category disrupting the housing market as well. Renting is a deliberate choice that supports mobility, reduces home maintenance burdens and better fits with the way some people want to live, Zillow pointed out.

Nearly three in five renters plan to keep renting in 2026, with only about one-third (37%) noting they would buy a home if mortgage rates dropped.