US economy enters 2026 strong on paper, fragile beneath the surface

• Labor market deterioration accelerated with unemployment rising 0.5 points to 4.6%, minimal job growth outside healthcare, and over 10% of workers experiencing pay cuts
• Despite inflation falling to 2.7%, 70% of Americans report struggling to afford basics as food, housing, and utilities remain far above pre-pandemic levels
• Wall Street expects S&P 500 gains to moderate to single digits in 2026 after three years of double-digit returns, potentially limiting wealth effects that have supported consumption

The US economy enters 2026 with mixed signals, showing 2.5% GDP growth in Q3 2025—the fastest in two years—while full-year 2025 growth reached approximately 2%. The S&P 500 gained 16% in 2025, marking three consecutive years of double-digit returns, though Wall Street expects more modest mid-to-low double-digit gains for 2026.

Despite positive headline numbers, underlying weaknesses persist. Unemployment rose to 4.6% by November, up half a percentage point year-over-year, with over 10% of workers experiencing pay cuts. College-educated workers faced unusually high unemployment levels, while Black unemployment increased sharply. Job growth concentrated primarily in healthcare and social assistance, with manufacturing losing positions throughout 2025.

Inflation cooled to 2.7% annually but remains above the Fed's 2% target. More critically, 70% of Americans report struggling with basic expenses as food, housing, insurance, and utilities remain significantly elevated from pre-pandemic levels. Utility bills rose by double digits over the past year.

Policy support for 2026 includes Federal Reserve rate cuts bringing the benchmark to 3.5-3.75%, with markets expecting two additional cuts. Tax changes from mid-2025 will appear in refunds and lower withholding, while government spending normalizes after 2025's shutdown. Goldman Sachs projects growth slowing to 1.8% in 2026.

Key risks include President Trump's pressure for lower rates and potential Fed chair replacement when Jerome Powell's term ends, potentially affecting long-term yields. The economy's reliance on narrow sectors—particularly AI and technology investment—raises concerns about whether growth can broaden beyond asset price gains that primarily benefit higher-income Americans. The disconnect between strong GDP figures and weak employment growth remains the central challenge for sustainable expansion.