The U.S. economy in 2025 demonstrated a complex performance, marked by overall economic growth alongside a deceleration in hiring activity, elevated inflation rates, and an increase in unemployment. Economic data collection and clarity were further impacted by a six-week government shutdown in late 2025. This combination of factors, including the ongoing influence of tariffs and the increasing adoption of artificial intelligence, prompted questions among policymakers and economists regarding the economic trajectory for 2026.
Economic Performance Overview
The year 2025 was characterized by a combination of economic expansion, a slowdown in job creation, persistently elevated inflation, and rising unemployment figures. The economy also continued to exhibit a "K-shaped" recovery pattern, where a growing proportion of overall spending originated from higher-income U.S. households, indicating potential challenges for lower-income families despite aggregate growth.
A six-week government shutdown in late 2025 disrupted the collection and dissemination of economic data. This event resulted in a less clear economic picture for Federal Reserve policymakers, with full clarity anticipated to emerge gradually during 2026.
Economic Growth
Consumer spending remained strong in 2025, contributing to a 4.3% annual growth rate in the July-September quarter. This represented the largest quarterly gain in two years and was primarily driven by higher-income consumers. This robust performance followed two quarters where tariffs influenced economic patterns. The first three months of the year saw an economic contraction, attributed to a surge in imports as businesses sought to bring in products before new duties were applied. Economic growth was projected to continue into the final three months of 2025, though the government shutdown was estimated to reduce overall growth by one percentage point.
Labor Market Dynamics
Hiring activity slowed throughout 2025, with job gains weakening following the announcement of tariffs in early April. The economy recorded job losses in June, August, and October. Average monthly job growth in 2025 was reported to be the lowest in decades, excluding recession years.
The unemployment rate increased from 4% in January. One report indicated it reached 4.6% in November, marking a four-year high, with December's figures scheduled for release in early January. Another report stated the unemployment rate reached 4.4% in December 2025. Contributing factors to the slowdown in hiring included uncertainty related to tariffs and the increasing adoption of artificial intelligence within businesses. Federal Reserve Governor Christopher Waller noted that business executives frequently cited artificial intelligence as a reason for their reluctance to expand workforces. Despite these trends, layoffs remained at low levels.
Signs of improvement in employment were observed toward the end of the year. While October saw 105,000 job cuts, these were primarily due to a reduction in federal government positions. Excluding government jobs, businesses added an average of 75,000 jobs per month between September and November, an increase from 13,000 per month during the June-August period. Hiring in 2025 was largely concentrated in specific sectors, including healthcare, restaurants and hotels, and government (excluding October), while most other large private industries experienced job reductions.
Inflation Trends
After significant declines in 2023 and 2024, inflation showed limited improvement in 2025. The Federal Reserve’s preferred measure of annual inflation rose to 2.8% in September from 2.7% in December 2024. The consumer price index indicated a cooling of inflation in November. These figures were influenced by the government shutdown and subsequent holiday discounts, which coincided with the period of data collection. Economists generally anticipate a gradual cooling of inflation in 2026, moving closer to the Federal Reserve's 2% target, despite potential short-term increases from annual price adjustments and tariff-related costs.
Impact of Tariffs and Uncertainty
Economists' predictions regarding the impact of tariffs implemented by President Donald Trump were observed in 2025. Significant price increases occurred for specific imports such as beef, coffee, and tomatoes, while overall price increases remained largely stable. However, the job market experienced more notable changes.
Economic uncertainty surrounding future tariff actions prompted businesses to halt hiring or, in some instances, implement layoffs. Higher prices were reported to be reducing profitability and rendering some investments unprofitable, leading to hesitation in new investments. Customer purchases were also delayed due to fluctuating tariff levels, with manufacturing contacts reporting reduced new orders. Businesses largely absorbed higher tariff costs without passing them on to consumers, a factor that helped control inflation. This situation could change depending on a Supreme Court ruling concerning the legality of significant tariffs, which might lead to potential refunds for businesses if invalidated. The observed limited price increases and slower hiring were primarily attributed to overall economic uncertainty.
Outlook for 2026
Some economists expressed cautious optimism for 2026. Stephen Stanley, Chief Economist at Santander, anticipated a pickup in hiring. This expectation was based on stronger growth, potentially fueled by substantial tax refunds early in the year resulting from President Donald Trump's tax cut legislation. Reduced uncertainty concerning tariffs was also projected to encourage companies to increase their workforce. Federal Reserve Governor Christopher Waller stated in late 2025 that 2026 "could turn out to be a better year," expressing hope for an improved labor market.