The U.S. economy has been surprisingly resilient in 2025. Growth held up well as policy-related pressures had offsetting impacts: Many companies accelerated artificial intelligence (AI) deployment and investment while reassessing or consolidating labor forces, mainly in an effort to manage tariff-related costs.
In 2026, a reasonable baseline outlook is that the U.S. economy will get fresh support from the One Big Beautiful Bill Act’s front-loaded fiscal easing, which should help to broaden growth and stabilize the labor market. Nevertheless, there are risks. Tariff, tax, and trade policies along with a new technology investment wave are creating winners and losers across the economy. The push and pull between these groups, and the potential fits and starts in investment cycles, could have implications either way. Shifting personnel at the Federal Reserve creates additional uncertainty.
We will be discussing these issues and more at our upcoming Cyclical Forum – when PIMCO’s investment professionals gather to discuss the outlook for the global economy and markets along with investment implications.
Before we discuss these forward-looking issues, it’s important to think about how things have progressed in 2025, and where the surprises have been.
The story of 2025: Tariff and tax policy accelerated AI deployment
U.S. real GDP growth was surprisingly resilient in 2025 amid the Trump administration’s fiscal, trade, and immigration policy changes. We await further economic data releases (delayed by the government shutdown), and for now we estimate real U.S. GDP grew between 1.5%–2.0% in 2025. That’s down from the 2.5%–3.0% pace in 2024, according to the Bureau of Economic Analysis (BEA), but much better than many expected. Similarly, core U.S. inflation remained elevated at 3% (according to the Bureau of Labor Statistics (BLS)), but was also more benign than many had feared, as tariff-related adjustments were more gradual and uneven across industries.
Benign growth and inflation didn’t mean there was an absence of policy adjustments. Rather, policy actions – and their interaction with new technologies – drove unexpected macro outcomes: Tax and tariff policies accelerated AI deployment, investment, and wealth creation, with offsetting implications for growth and inflation (see Figure 1).
Figure 1: Estimated contributions to U.S. GDP (trailing 4 quarters) of various factors vs. 2% trend
Indeed, a more detailed look at 2025 U.S. economic performance reveals stark divergences under the surface. Large, capital-intensive companies with more limited exposure to tariff costs, or companies able to offset those costs with more generous investment tax credits, were relative winners. Small and midsize labor-intensive companies exposed to the trade sectors or immigration policy changes were relative losers. Credit and equity markets have repriced credit risks in these sectors (read more in our recent Macro Signposts, “Cracks Emerge Beneath Market Resilience”).
The existence of winners and losers within and across industries had three important macro implications.
First, elevated competition limited overall corporate pricing power and tempered tariff-related consumer price adjustments. We estimate around 40% to 50% of the tariff costs were passed onto consumers, lifting core inflation by around 0.4 to 0.5 percentage points (ppts). Within industries, larger, more capital-intensive companies that could capture offsetting tax cuts were better positioned to compete on pricing and absorb tariff costs. This forced a broader focus on defending margins through cost savings initiatives – especially labor cost savings.
Second, the search for ways to cut costs likely accelerated AI deployment, which in turn contributed to the 2025 pickup in hyperscalers’ capital outlays, plus large investment announcements for 2026 and beyond. We estimate AI and related investment, and wealth it generated, contributed roughly 0.5 ppts to 2025 real U.S. GDP growth. Data center investment, including structures, servers, chips, and other components, grew $200 billion nominally in 2025, although the contribution to real GDP growth was limited due to reliance on imported servers. Software and R&D investment also accelerated and were a larger contribution to GDP, while AI-driven stock market returns also contributed to surprisingly resilient consumption from wealth creation despite slower real labor income growth.
Third, labor market challenges offset some of the technology-driven momentum by reducing real household labor income growth below 1%, according to our estimates. Policy shifts directly or indirectly fueled the labor market challenges: Tariff adjustments weighed on labor demand, and immigration policy changes reduced labor supply. We estimate changing immigration policy reduced the breakeven rate of monthly payroll growth needed to stabilize unemployment from an estimated peak rate of roughly 200,000 per month in 2023 and 2024 down to 50,000 per month in 2025. Similarly, reported payroll growth decelerated from a roughly 110,000 monthly pace in 2024 to a 50,000 average monthly pace in 2025. (All employment data are from the BLS.) However, the unemployment rate rose 0.4 ppts to 4.4% thus far in 2025, suggesting labor demand fell faster than labor supply. The ratio of job openings to unemployed also fell, with professional and business services, retail, and construction categories – industries most exposed to tariffs and tech themes – declining the most.
In 2026: resilient growth, sticky inflation, stabilizing labor markets
The combination of policy and macro factors supported more resilient, yet more narrowly focused U.S. growth in 2025. While we expect the resilience to continue in 2026, there are also good reasons to expect a broader demand recovery under the surface, which could stabilize (and even tighten) the labor market, further delaying progress on bringing inflation to target.
Net new fiscal stimulus from the One Big Beautiful Bill Act will likely provide fresh support to after-tax incomes of households and businesses, helping offset the tariff-related drag. Business investment tax incentives were retroactively applied and will result in a one-time cash injection for corporates able to take advantage of up-front capital expense credits.
Households will also receive larger refund checks in early 2026 due to the lower state and local tax credit cap, expanded child tax credits and remitted taxes paid on 2025 overtime and tips income. We estimate new household tax relief could amount to $200 billion next year – that’s about 0.6 ppts of GDP – with roughly half of that coming via refunds.
The AI/tech investment cycle should also continue to support the economy. Greater spending on AI implementation, software, and research and development across a broader range of companies could help offset some cooling in data-center-related capex. (Read more in our recent Macro Signposts, “The Economics of AI Scale.”)
Trade policy uncertainty and tariff-related economic drag should also diminish in 2026 (see Figure 2). The Supreme Court is likely to strike down the Trump administration’s IEEPA tariffs (those implemented under the International Emergency Economic Powers Act), which would force the Trump administration to refund roughly $100 billion of tariffs paid in 2025 and pivot to a national security framework reliant on Section 232 product tariffs and Section 301 trading partner tariffs. (Read more in our recent Macro Signposts, “Tariffs Are Here to Stay.”) As tariff policy becomes more certain and business adjustments run their course, investment and hiring should reaccelerate somewhat. Private sector U.S. investment commitments announced with the Trump administration are an additional possible tailwind.
Figure 2: Estimated quarterly impact of tariff, tax, and spending policy changes (positive numbers are supportive of growth)
Reasonable baselines don’t come without risks
While we see a reasonable baseline that broadening demand is likely to maintain the U.S.’s surprising economic resilience, that outlook doesn’t come without key questions and key risks. For example:
- Will the AI investment cycle continue to provide the wealth and growth impulse it did in 2025?
- Will U.S. investment broaden as uncertainty fades?
- Will the companies that aren’t well-positioned for the new policy environment contribute to a broader default cycle, with negative implications for labor markets?
- Will higher-income households continue to drive resilient consumption?
- How will changes in Fed personnel change how the Federal Open Market Committee views the balance of risks and therefore interest rate policy?
We will discuss all of these questions and more, including the investment implications, at our Cyclical Forum next week.
Bottom line
The economic adjustments driven by tariffs, taxes, and technological innovation surprised many in 2025, and the U.S. economy will likely surprise forecasters again in 2026. At PIMCO, a focus on the baseline outlook is just the start. We believe it’s an understanding of the risks that will generate potential performance for our clients. Our Cyclical Forum process is designed to help us frame and capture exactly that.
