This content first appeared in Economy & Business 2026. Click here to view the full publication.

By Dr. Michael L. Walden, PH. D

In many ways, 2025 will be considered one of the most challenging and confusing years – in terms of the economy – in recent times. The new Trump Administration embarked on a set of economic policies that could be considered inconsistent. At the same time, the other major economic policy-maker, the Federal Reserve, struggled with deciding which of its two objectives – keeping the inflation rate low and keeping the jobless rate low – should be given prominence. Still, with this background both North Carolina and Wake County continued prospering and growing.

This report first reviews the progress, policies, and issues of 2025, and then uses those results and insights to make economic forecasts for 2026 for the nation and for North Carolina and Wake County.

While final numbers are not yet in, it appears the national economy will have expanded at a rate near 2% percent in 2025, a rate slightly below the ten-year average. But since the rate is positive, indicating the economy grew, it means a recession was avoided.

Three additional major national economic metrics – the jobless rate, job growth, and retail sales growth, showed similar trends. The jobless rate remained relatively stable at close to 4%, but modestly higher than prior to the pandemic. Jobs increased in 2025, but at about half the rate of increase as in 2024. The growth in the volume of retail sales in 2025 stayed close to the annual ten-year average. Hence, if there was softness in the economy in 2025, it was in the job market.

Average price inflation is an important factor for households’ standard of living. While the annual inflation rate dropped from 9% in 2022 to 2.3% in early 2025, it rose to 3% in late 2025. In 2025, average worker earnings were still rising faster than prices, but the difference between earnings’ gains and price increases narrowed in 2025 compared to 2024. Hence, the average worker could not buy as much in 2025 as in 2024, meaning the average household standard of living decreased.

Based on available data, 2025 was also a year when both North Carolina and Wake County continued to grow, although the pace of growth slowed compared to 2024. But both areas maintained a lower jobless rate than the nation and continued to rank high on attractive locations for new businesses.

What drove the economy in 2025? There were several measures passed by Congress in the “big, beautiful bill” that will stimulate the economy, but most won’t have full impacts until 2026. But clearly what did have impacts in 2025 were the tariffs imposed by the Trump Administration on a variety of products. Although the intention of the tariffs was to motivate more production in the US, the short-run impact has been to increase costs for many US businesses. This is because tariffs are not paid by foreign exporting companies, but instead are paid by the importing US companies. This means the estimated $200 billion from tariffs collected thus far by the US government has been paid by US companies. To make the tariff payments, US companies have absorbed the costs through reducing operating costs, payroll, or profits, or companies have passed the tariff costs on to consumers in the form of higher prices. Economists have estimated the tariffs account for a large part of the higher inflation rate in 2025.

In looking ahead to 2026, there are always pluses, minuses, and uncertainties that affect forecasts. Regarding pluses, there will be new tax benefits that should make production and earning more profitable, which in turn should stimulate economic growth. There’s also the possibility tariffs will be significantly reduced. Already at the end of 2025 the Trump Administration reduced some key tariffs on imported foods. There is also a looming decision by the Supreme Court about whether the President exceeded his authority to impose some tariffs. If the Court decides he did, then tariffs will be significantly reduced, which should take some pressure off of prices and the inflation rate.

Of course there are continuing negatives, mainly in the world, that create on-going worries for the economy. Perhaps at the top of the list is the continuing Ukraine War, which impacts world energy markets and generates worries about possible international confrontations involving the US.

Two uncertainties in 2026 involve the labor market. One is how on-going deportations will impact labor supply for key industries, including agriculture and construction. Both of these industries are important to North Carolina. The second uncertainty is how the continuing implementation of AI will change the labor market. There have already been some major layoffs in large companies that have been attributed to the anticipation that fewer workers will be needed as AI is adopted. I have estimated that half-a-million workers in North Carolina could be significantly affected by AI.

Here’s my reading of the economic “tea leaves” for 2026. The Federal Reserve appears to be on a path of lowering their interest rates, which if other interest rates follow, should boost the economy. If tariffs are cut and new tax benefits are used, both better economic growth and lower inflation should be the result. Yet a big question is the job market. Can better business conditions outpace AI’s potential negative influence? Also, how fast can our educational systems prepare to provide needed retraining for new unemployment created by AI?

Walden is a Reynolds Distinguished Professor Emeritus at North Carolina State University and President of Walden Economic Consulting. Among his numerous awards is the Order of the Long Leaf Pine. The author of 15 books, he is working on a new book about the future North Carolina economy for the UNC Press.

This content first appeared in Economy & Business 2026. Click here to view the full publication.