The Big Idea
Out-of-consensus calls on the economy in 2026
This material is a Marketing Communication and does not constitute Independent Investment Research.
The US economy is likely to be considerably stronger in 2026 than the consensus, and that should lead to some important surprises. An end to the immense degree of policy-related uncertainty that characterized most of 2025 should allow businesses to re-engage, driving an acceleration in business investment activity and at least a mild firming in the labor market. Coupled with stubbornly above-target inflation, this economic landscape should convince the FOMC to hold policy steady throughout 2026.
#1: Above-trend real GDP growth
As has become annual tradition at this time of year, the consensus forecast for next year calls for the economy to roughly track its long-run trend. Twelve months ago, consensus had real GDP growth advancing at almost exactly 2% every quarter for both 2025 and 2026. Back then, I thought the economy would do worse than consensus in 2025 due to policy-related uncertainty but would then accelerate substantially in 2026.
November’s Blue Chip Economic survey median projection for 2026 has real GDP growth of 1.8%, in line with the FOMC’s estimate of the economy’s long-run potential. I anticipate a stronger expansion of around 2.5% for real GDP next year. Look for the administration to resolve the bulk of outstanding policy-related uncertainty by settling on an endgame for trade and tariffs strategy. At the moment, many businesses have hit the pause button, freezing their plans regarding investment and workforce changes. Greater clarity regarding the policy outlook, along with the powerful investment incentives passed in the July fiscal package and a pro-growth regulatory impetus, should drive a noticeable pickup in capital outlays in 2026, providing momentum for an acceleration in real GDP growth versus 2025.
#2: A brighter labor market in 2026
The labor market has moderated sharply in 2025. Before the benchmark revisions previewed this summer, payroll job gains averaged 168,000 in 2024. However, the preliminary annual benchmark revision estimate for the 12 months ended in March cut the pace of net hiring roughly in half for that period, from close to 150,000 a month to around 75,000. Since the spring, job growth has slowed even further to below 50,000 per month.
The situation is convoluted by the fact that both the supply and demand sides of the labor market equation have been moving around violently. Usually, economists can rely on a relatively steady growth in labor supply and focus on the demand for workers. However, the extreme shifts in immigration policy in recent years led to a substantial acceleration in the influx of workers followed by a sharp slowdown in 2024 and 2025. As a result, economists currently estimate that the breakeven pace of job gains, the rate of advance necessary to keep the labor market steady, has fallen to 50,000 a month or lower.
The bulk of the slowdown in job growth laid out above likely reflects changes in labor supply. Even so, the gentle uptrend in the unemployment rate in 2025 indicates that labor demand has weakened slightly more than supply, leading to a marginal easing in labor market conditions. The unemployment rate averaged 4.2% in the second half of 2024 and currently sits at 4.3%. Most economists expect a modest uptick over the balance of 2025. I have the jobless rate ending this year at 4.4%, while the consensus projects 4.5%.
Amid all of the negative buzz recently around the lack of hiring and the prospect of rising layoffs, few have stopped to ask the obvious question: why? In my view, one of the main reasons that labor demand has cooled in recent months is, as discussed above, the reticence of businesses to make long-term commitments at a time when policy-related uncertainty is elevated. If, as I expect, the administration declares victory on the tariff front and moves on in the coming months, coupled with corporate tax cuts kicking in and regulatory relief occurring, firms are likely to re-engage in 2026, boosting not only investment activity but also hiring.
We are unlikely to see a massive acceleration in net hiring, but the bar is relatively low. Recall that with the growth in the labor supply constrained by immigration policy, a gain of anything more than around 50,000 per month would likely be sufficient to push the unemployment rate down over time. For 2026, the consensus forecast calls for the unemployment rate to hold steady all year at 4.5%. In contrast, I look for the jobless rate to gently trend lower, returning to around 4.1% by the end of next year, roughly where it began 2025.
#3: Fed on hold all year
A parade of Federal Reserve officials since the October FOMC meeting have signaled their reticence to cut rates further in the absence of either a decline in underlying inflation or a further leg down in the labor market. At the post-FOMC press conference in October, Chair Powell sent a shot across the bow to financial market participants, who at the time were pricing in a third consecutive quarter point easing for December and had substantial additional easing factored in for 2026, when he noted that a December move was far from guaranteed.
Based on the subsequent comments from most Fed officials, that was an understatement. Aside from a few doves who continue to push for easier policy, most FOMC participants have counseled caution and want to see concrete progress on inflation toward the Fed’s 2% target before cutting rates further. The case for a pause in December looks compelling unless the economic data take a dramatic turn toward weakness.
That pause could easily turn into an extended period of stability next year. If my economic forecast is correct, then the FOMC will be faced in 2026 with above-trend real GDP growth, a gently falling unemployment rate, and underlying inflation running modestly above the 2% target. That would clearly not be a recipe for further rate cuts. As a result, I am calling for the FOMC to hold the policy rate steady at its current setting through all of 2026, even as fed funds futures price in between 75 and 100 bp of further rate cuts through the end of next year.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2026 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
