Is America great again?

The year started with US President Donald Trump’s return to the White House. Markets were optimistic about his “Make America Great Again (MAGA)” campaign even before his inauguration.

However, market optimism faltered as the year progressed. Trump’s protectionist policies seemed to have failed to “Make America Great Again.” Instead, these measures on tariffs and immigration triggered a cooling labor market, elevated inflation, and sluggish growth. On top of these, a historic 43-day government shutdown did not just halt the recovery; it also led to some irreversible impact to the economy.

“Protectionist” tariffs

Sweeping tariffs implemented by Trump changed trade dynamics across the world. Apart from a 10% tariff across trading partners of the US, there were higher tariffs especially on countries that have a wide trade deficit with the US. According to BMI’s estimates, the average effective tariff rate is 18% as of September, which they estimate brings in 1% of the country’s GDP.

Trump appeared to have calmed down on imposing new tariffs, especially pending the US Supreme Court ruling on some of the tariffs he implemented. Risk remains as markets stay alert for potential shifts in tariff. Such a decision would require government refunds, potentially exerting significant pressure on US fiscal conditions.

OK-shaped economy

The US slipped into a shallow recession this year as importers frontloaded shipments ahead of the implementation of higher tariffs. While the economy rebounded after the first-quarter contraction, average quarter-on-quarter GDP growth in the first half remained below 2%. Even with higher growth expectations in the second half of this year, the full-year average is likely to fall short of post-COVID recovery levels.

A K-shaped economy in the US continues to prevent a deeper downturn in the US economy. Consumer spending shows some divergence with high-income households maintaining robust spending, especially during Thanksgiving and into the holiday season. Meanwhile, the spending of lower-income households remains constrained.

Looking ahead, the US is poised for a moderate recovery in 2026, supported by better financial conditions from a more accommodative policy stance from the US Federal Reserve (Fed).

Cutting constraints from cutting rates

A cooling labor market which now confirms sluggish economic growth, amid elevated inflation, strengthens the case for further reductions in the Fed funds rate. Meanwhile inflation, although above target, has yet to post sharp spikes as companies appear to be absorbing some tariff costs, likely at the expense of other operational margins.

Adding to the case for easing is the expected shift in the Federal Reserve’s composition in 2026. Current Chair Jerome Powell has softened his stance, while his replacement, to be appointed by Trump, is expected to be even more dovish in leaning.

Furthermore, the rotation of voting Fed presidents next year will tilt towards being even more dovish. This suggests that the policy bias of the voting members will likely prioritize the labor market and favor more rate cuts.

Overall, 2026 could be a moderate recovery year for the US, especially as investments and consumer spending are expected to benefit from a more accommodative policy rate stance.

MARIAN MONETTE FLORENDO is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She is a Certified Treasury Professional. She also holds an undergraduate degree in Mathematics from Ateneo de Naga University and an MA Economics degree from UP Diliman. Outside of work, she enjoys traveling and watching mystery films.