As the economy enters a new year, businesses can expect a vibrant but generally supportive operating environment.
“Despite the significant trade shock from tariffs, the U.S. economy has held up admirably,” said Bernard Jarosz Jr., chief U.S. economist at Oxford Economics. “We expect growth to accelerate in 2026 as the One Big Beautiful Bill stimulus kicks into gear.”
Oxford Economics forecasts real GDP growth of 2% in 2026, slightly higher than the 1.7% expected at final count in 2025. Both years are in the weakest growth environment in a decade, with growth below the 2.8% growth expected in 2024.
(Gross domestic product, or the total value of a country's goods and services, is the most commonly used measure of economic growth. The effects of inflation are subtracted from “real” GDP.)
higher profit
The country's economic growth is highly dependent on launching new business initiatives. Unfortunately, companies are holding back for a variety of reasons. Although interest rates have fallen, they are still at their highest levels since 2022. The cost of materials and supplies is increasing. There is uncertainty about the country's future trade policy. Low- and middle-income consumers are worried about inflation and are draining or closing their wallets. Such headwinds can make many attractive projects look less promising.
You might also expect your business to become less profitable. However, Oxford Economics expects GDP to follow the same general pattern as GDP.
“We expect corporate profits to increase by 4.9% in 2026,” Yaros said. “This is a significant increase from the 0.5% expected once the 2025 numbers are finalized.” Still, the pace in 2026 remains slower than the 7.9% in 2024.
The expectation that profitability will return in 2026 comes from the belief that stimulus from Washington will lift all boats.
“We believe the passage of the One Big Beautiful Act, which includes tax cuts for businesses and households, should help the economy regain momentum in early 2026,” said Anirban Basu, chairman and CEO of Sage Policy Group.
The law's 100% bonus depreciation should encourage business investment, and the large tax refunds should stimulate consumer spending. Both activities are important drivers of the country's economy. This stimulus from Washington comes at a time when companies are gaining a stronger foothold in the country's changing trade policy.
“There's been some shock to the system over the past year with tariffs and things like that, but it's taken a while for a lot of carriers to understand the impact,” said Andrew Petryk, head of industry at investment banker Brown Gibbons Lang & Company.
Specifically, importers have responded to China's tariffs by sourcing from other countries, a move that has also contributed to the country's recent supply chain problems.
“Lead times have shortened as companies have found alternative or additional suppliers,” Petryk said. “Companies that used to rely on one or two vendors are now using three, four or five vendors.”
Businesses will also benefit from lower costs over the coming months as the Federal Reserve shifts its focus from fighting inflation to promoting employment.
“We expect inflation to peak at just above 3% when the numbers are finalized in 2025, and we expect the Fed to continue cutting rates through 2026 until the federal funds rate falls to around 3%,” Jarosz said. Although this rate is much higher than the rate at the beginning of 2022, it is a significant improvement from the 4.3% rate in mid-2025.
The decline in interest rates, which encourages companies to start new initiatives, also reflects the loosening of pockets of the country's financial institutions.
“Corporate credit conditions have improved significantly,” Bass said. “Companies with strong balance sheets will have bankers willing to supply them with debt. We also know that equity investors, including private equity, remain very active in providing capital.”
housing slump
Speaking of lower interest rates, for the housing sector, which is a key driver of the country's economic health, lower interest rates can't come soon enough.
“Housing is in shambles,” Yarosz said. “Single-family home builders are grappling with a growing supply of unsold, completed new homes, increased competition from the resale market, and declining home prices in an increasing number of regions.”
Higher costs will not solve the problem.
“Significant increases in interest rates since summer 2022 have increased the monthly payments required for buyers of new or existing homes,” Petryk said. “It's also led to a significant market shortfall, as families who bought their homes more than three to five years ago are unwilling to forgo mortgages that are less than 3 percent.”
Mortgage rates have an important impact on consumer attitudes, which are a key driver of the economy. Short-term interest rates could be lowered by the Federal Reserve, but it's unclear how much of an impact that would have on long-term interest rates applied to financing new homes.
“I don't expect mortgage rates to drop enough to cause a significant change in single-family home construction,” said Bill Connally, president of his consulting firm in Lake Oswego, Oregon.
Cautious builders. Reluctant seller. Buyers are sluggish. All of these are impacting the housing market. Oxford Economics expects housing starts to fall by 3.5% in 2024, then 4.3% in 2025, and a further 2.3% in 2026. Existing home prices are expected to rise by 4.4% in 2024, then only 1.5% in 2025 and 2.3% in 2026.
Concerned about rising costs of living, consumers are cutting back on all types of spending. Their hesitation has implications for the retail sector, a key driver and bellwether of the economy.
“The projected year-over-year retail sales growth rate in 2026 is 3.8%, revised down from 4.5% in 2025,” said Scott Hoyt, senior director of consumer economics at Moody's Analytics. Much of the increase in both years was due to inflation. “High prices are a bit of a mixed bag. High prices erode consumer purchasing power and confidence, but they also support nominal sales by raising the prices retailers sell.”
construction hardships
Outside of the single-family home market, builders have their own problems. Multifamily builders are hesitant to break ground on new units as they work through a backlog of units under construction.
“I think multifamily construction will decline in 2026,” Connally said. “Vacancy rates are rising and rents are falling at a rate of about 1% per year.”
Meanwhile, contractors in the commercial, office and hotel markets are feeling the brunt of an environment of economic slowdown, high interest rates and uncertainty. “Many non-residential properties are either flat or in slow decline,” Connally said. “Even chip manufacturing plants, while still strong, are tapering off.”
One bright spot in construction is data centers. They show no signs of slowing down and are a big customer for electricians, plumbers, suppliers of scaffolding and all kinds of industrial products.
“If you look at the details of what capital equipment is being purchased and the economic statistics, you'll see that a lot of it is data center-related equipment,” Connerly said. “Data centers also require a lot of wiring, connectors, and piping of all kinds for cooling.”
All sectors of the construction industry have a common challenge: finding a workforce. Oxford Economics expects the unemployment rate to be 4.4% and 4.3% at the end of 2025 and 2026, respectively. This is not much higher than the 4.1% at the end of 2024. Lower unemployment rates could lead to higher labor costs, mainly due to slower growth in the country's working-age population and aggressive immigration policies.
business confidence
For all business sectors, money and labor are not the only factors of production that are on the rise.
“The real problem is that global prices have increased significantly in recent years,” Bass said. “Construction materials are more expensive. And, of course, there are tariffs on items like steel, aluminum and copper.”
It's no wonder, then, that many business owners consider high business costs a top priority.
“Going into 2026, the biggest concern for companies is profit margins,” Bass said. “Many carriers are simultaneously experiencing a decline in demand and an increase in the cost of providing their services.”
Given all the business concerns, it's no wonder so many projects are being put on hold.
“It's difficult to cut costs when materials and labor costs are soaring,” Bass says. “Too often the pro forma is not clear. Many companies are not expanding and are trying to cut last-minute spending. They are focused on preserving cash flow by delaying hiring and are less aggressive about leasing or purchasing equipment, especially equipment that is sensitive to tariff prices.”
This common business hesitation is reflected in the numbers.
“We expect business investment to increase by only 1.6% in 2026, after increasing by 3% in 2025 and 3.6% in 2024,” Jarosz said.
Looking to the future
As we enter the first few months of 2026, economists suggest keeping an eye on the following key economic indicators to get an idea of how this year will turn out.
1. Employment: “We're going to pay close attention to the unemployment rate,” Jarosz said. An unexpected drop in jobs could spur interest rate cuts as the Fed looks to strengthen economic expansion.
2. Consumer spending: “How's it going for consumers?'' Bus posing. “Keep in mind that many low- and moderate-income people are experiencing financial strain. Credit card, mortgage, and loan debt and delinquency are on the rise.”
3. Inflation: “How are consumers doing?” Bus poses. “Keep in mind that many low- and moderate-income people are experiencing financial strain. Credit card, mortgage, and loan debt and delinquency are on the rise.”
Oxford Economics still expects the country to avoid recession, and the projected 2% GDP growth rate is right around what economists define as the country's “natural growth rate” – the level that supports business activity, maintains full employment and avoids triggering inflation.
But perhaps even more important is a lesser-known threat to productivity.
“Right now, it's this country's low population growth rate that permeates throughout the economy,” Connally said. “The Trump administration's policies have reduced immigration. The next generation entering the workforce is about the same size as the boomers retiring, so there will be no net addition to the workforce.”
In response to this trend, companies will look for ways to maximize labor profits by increasing output per worker, Connally said. “In 2026, the focus of companies will not be on giving people a hard time, but on improving productivity by giving them better tools, better training, and better first-level managers.”
