US economy to ride tax cut tailwind but faces risks

By Ann Saphir

Dec 29 (Reuters) - A see-saw year for the U.S. economy in 2025 looks set to give way to a stronger 2026 thanks to tailwinds from President Donald Trump's tax cuts, less uncertainty around tariffs, the ongoing artificial intelligence boom and a late-year run of interest-rate reductions from the Federal Reserve.

Among the biggest drivers ​of a pickup in growth, economists say, are fatter tax refunds and smaller tax withholdings on paychecks that are expected to provide a lift to consumer spending, the backbone ‌of the American economy.

Trump's One Big Beautiful Bill also gives companies a range of credits and tax breaks, including the ability to fully write off expenses from investments, that may fuel capital spending beyond data centers and other AI-related areas.

"The boost ‌from fiscal stimulus alone could add one-half percent or more to first quarter GDP growth," wrote KPMG chief economist Diane Swonk.

At the same time, the impact of Trump's tariffs on prices is projected to peak in the first half of the year. If price pressures then recede, as Fed policymakers increasingly believe they will, wages will have more room to outpace inflation, bolstering household finances further.

Meanwhile business spending on the infrastructure that powers AI, a key component of economic growth in 2025, looks poised to continue as mega technology firms such as Amazon and Google parent Alphabet promise more investments ahead.

The upshot: a better outlook for businesses ⁠stuck for much of this past year in a "low-hire, low-fire" mode as ‌they sought to weather Trump's disruptive trade policies and aggressive immigration crackdown.

"We expect fading policy uncertainty, the boost from tax cuts and the recent loosening of monetary policy to mean the economy strengthens in 2026," said Oxford Economics analyst Michael Pierce.

'HEADWINDS ARE ABATING'

A stronger economy was a core promise of Trump's presidential ‍election campaign, but as he began his second term in the White House early this year the economy shrank amid the rollout of his unexpectedly aggressive tariffs. The average U.S. import levy shot to nearly 17% in Trump's first year from less than 3% at the end of 2024, according to Yale Budget Lab.

Growth rebounded in the second quarter as the contours of his trade policies became clearer and businesses and households began to adjust. ​It accelerated further in the third quarter to a 4.3% annualized pace as Americans, particularly those with higher incomes who benefited from the runup in the stock market, increased spending and companies ‌poured money into AI.