April 2026 will mark the sixth year of the current economic expansion, making it one of the longer growth periods of the post–World War II era. Still, it’s fair to wonder how much longer it can last, given the ongoing policy whiplash that has defined the second Trump administration. Tariffs have been reduced but not eliminated, budget battles threaten another government shutdown, and the United States is now engaged in a complex war in Iran with little explanation from the administration about its ultimate objectives or timeline. Oil prices have surged and global trade has been disrupted. Throw in weak GDP growth from the 4^th quarter of 2025 and a weirdly flat labor market, and it’s little wonder financial markets are nervous.

While these developments increase uncertainty and create a drag on the economy, they are not enough on their own to trigger a recession. The U.S. economy today still retains considerable momentum. What they may represent instead is a distraction from the political turmoil facing this administration on several fronts—not unlike the 1997 film Wag the Dog, in which a fictional war is staged to distract from a president’s personal scandal. This war, however, is very real. And the economic imbalances it could create might end up being the spark that exposes the deeper and far more serious imbalance: the federal government’s current borrowing binge. But for now, the short run indicators still point to continued, if modest, growth.

While the final quarter of 2025 came in weaker than expected, with only 0.7% GDP growth, the softness had a very specific source. Declines in federal spending, driven by the government shutdown, reduced overall growth by more than 1.1 percentage points, according to the national accounts. The spillover from this disturbance caused consumer spending and business investment to slow as well, which is hardly surprising given that total federal spending in the United States now exceeds $7 trillion annually, slightly less one-quarter of U.S. GDP when transfers are included.[1]

But this shock is transitory. The government has reopened and with military activity now underway in the Middle East, federal spending should rebound sharply in the 1st quarter of 2026.

There are other reasons to expect stronger economic activity in the near future.

Consumer spending prospects remain positive. U.S. household disposable income has continued to grow, albeit slightly slower, in 2026 in large part due to tax reductions included in last year’s ‘One Big Beautiful Bill’ that offset the ending of Trump’s tax cuts from his first administration. The slowdown in spending at the end of 2025 appears to have been driven primarily by an increase in the savings rate rather than deteriorating household finances.[2]
Concerns about rising oil prices also deserve some perspective. In inflation-adjusted terms, current oil prices remain well below the peaks reached in 2014 and 2022. More importantly, the structure of the U.S. energy economy has changed dramatically. The shale boom of the past decade has transformed the United States into a major producer and exporter of energy. The country now runs a significant trade surplus in petroleum products, totaling roughly $60 billion in 2025.[3] Therefore, rising oil prices create regional winners and losers—benefiting energy-producing states like Texas and New Mexico even as costs for goods producers and consumers increase nationwide (remember, transportation is required for almost every product).

Higher oil prices will exert upward pressure on inflation, but that effect is likely to be offset in part by declining import prices following the Supreme Court’s removal of most of the tariffs imposed by the Trump administration in 2025. The administration has responded with a temporary 10% blanket tariff to replace those invalidated by the Court, but this measure is substantially smaller than the previous tariff regime and only lasts 150 days. While the original tariffs had limited measurable impact on trade flows, their removal has reduced uncertainty for firms reliant on imported inputs.

Geopolitical tensions have also strengthened the U.S. dollar. The conflict in the Middle East has pushed the dollar to a ten-month high as investors seek safe-haven assets in U.S. financial markets. This type of capital flow during global crises are a well-documented phenomenon.[4] A stronger dollar helps restrain inflation by lowering the cost of imported goods and reducing pressure on financial markets.

Monetary policy also remains supportive. Although the Federal Reserve has paused reductions in the Federal Funds Rate, policy remains accommodative. Quantitative tightening, the reduction of the Fed’s balance sheet that contributed to tighter credit conditions in recent years, has effectively come to an end. At the same time, the Federal Reserve’s Senior Loan Officer Opinion Survey suggests that banks are beginning to observe a modest increase in credit demand from businesses.[5] The easing of financial conditions has begun to revive segments of the commercial real estate market that had been largely dormant because of the sharp rise in interest rates.

Taken together, these factors suggest a boost to short-term economic growth in the United States in 2026, rather than continued slowing. Wag the dog, indeed. Mind you, this short run growth spurt comes at the expense of economic stability in the mid-term, but it’s reasonable to observe that the goals of this administration appear to be largely short term in nature.

The Weakening Labor Market

As for the lack of job growth (nonfarm payrolls have expanded just .1% over the last 12 months), when examining the numbers closely we find very little is fundamentally new in the labor market data. For several years the market has been characterized by unusually low hiring and separation rates. That is an illiquid labor market, not a collapsing one. Despite widespread concern about automation and artificial intelligence displacing workers, unemployment insurance claims have not risen in a way that indicates a significant increase in layoffs.

One possible explanation for the weak job growth is the contracting U.S. labor force. The nation’s dramatic shift towards aggressive immigration enforcement over the last 14 months has caused a complete collapse in undocumented workers migrating into the United States. Some surveys also suggest that undocumented workers who are already here may be self-deporting. According to the U.S. Census Current Population Survey, over half of all new workers entering the U.S. labor force over the past decade were born overseas; clearly a reduction in immigration could slow or even reverse the nation’s labor force growth.

You won’t see this in the official data. The reality is that we don’t know exactly how many people live in the United States, or how many are in the labor market. This isn’t because our government statisticians are incompetent, rather they face significant measurement challenges. With a high share of migrants entering the nation without documentation and a 2020 Census that was a statistical disaster due to the pandemic, it’s likely we’ll have to wait until 2030 to get a true sense of where things stand.

This statistical uncertainty may help explain why per capita disposable income growth appears to be slowing in U.S. Bureau of Economic Analysis data more than would be expected. That data comes from a completely different source and is not tainted by the difficulties related to measuring population size. It would suggest that this slowing is a function of cooling population growth rather than weakening household finances. But the real problem is not that finances are too weak, but too strong—driven by the implicit subsidy built into government borrowing.

The Federal Budget Deficit

Prior to the recent Supreme Court decision striking down broad tariffs, the U.S. government was already projected to borrow nearly $1.7 trillion in the current fiscal year.[6] Tariff revenue losses following the Court’s decision, paying back last year’s $180 billion tariff haul, increased military spending, and reopening the government after on and off closures during  the past year will bring the fiscal deficit for FY 2026–27 to over $2 trillion. This will push the entire federal debt to more than $40 trillion, a record share of the nation’s GDP. This clearly cannot continue.

The problem is that the current federal deficit represents a substantial injection of purchasing power into U.S. households. The deficit amounts to roughly $15,000 per household annually, equal to about 9% of average disposable household income and nearly 6% of GDP. A decade ago, that figure was closer to $5,000 per household, implying that almost one-fifth of the increase in household disposable income over the past decade has been indirectly financed through reduced taxes, necessitating the surge in federal borrowing.[7] In a short 20 years the nation’s public debt has expanded from 60% of GDP to 120% of GDP.

The Congressional Budget Office already projects federal debt rising toward historic highs relative to GDP in coming decades. Even these grim projections assume relatively stable interest rates and continued economic growth. As Olivier Blanchard argued in his presidential address to the American Economic Association, debt sustainability ultimately depends on the relationship between interest rates and economic growth.[8] When debt levels are high, even modest shifts in that relationship can quickly destabilize fiscal conditions. Today, even a small increase in interest rates or a modest slowdown in economic growth could cause the fiscal outlook to deteriorate rapidly.[9]

If such a fiscal reset becomes necessary, the resulting policy adjustments would almost certainly trigger a recession and/or a nasty bout of inflation.

Taken together, the outlook for the U.S. economy remains one of moderate growth in the near term, where the lack of employment growth and the impact of political turmoil are offset by growing stimulus from both the federal government and Federal Reserve. Growth of around 2.5% in 2026 remains a reasonable baseline expectation. At the same time, the probability of a more severe disruption continues to rise as fiscal imbalances accumulate—we’ve said it before, short term growth is being achieved by borrowing from the future.

The largest near-term issue is the conflict in the Middle East. If we go by recent experience, this conflict will be short and ultimately inconsequential to global economic conditions. But if it should morph into something bigger, the administration might see that dog turning around to bite at the hand on its tail.

Footnotes

[1] U.S. Bureau of Economic Analysis, National Income and Product Accounts.

[2] U.S. Bureau of Economic Analysis, Personal Income and Outlays.

[3] U.S. Energy Information Administration, petroleum production, and trade statistics.

[4] Federal Reserve Bank of New York, research on dollar safe-haven flows.

[5] Federal Reserve Board, Senior Loan Officer Opinion Survey on Bank Lending Practices.

[6] Congressional Budget Office, Budget and Economic Outlook.

[7] Furman, Jason & Summers, Lawrence, research on fiscal deficits and macroeconomic demand effects.

[8] Blanchard, Olivier (2019), “Public Debt and Low Interest Rates,” AEA Presidential Address.

[9] International Monetary Fund, Fiscal Monitor and Debt Sustainability Analysis.