State of the economy at the end of 2026
Short Answer
Both the model and the market expect Stagflation at the end of 2026, with no compelling evidence of mispricing.
1. Executive Verdict
- New policies add 1.9% of GDP to the FY2026 deficit.
- Geopolitical risks threaten a $112 WTI crude oil "super-spike."
- US consumers demonstrate sustained resilience against economic pressures.
- No broad evidence exists for an AI-driven productivity boom.
- FOMC 2025 projections forecast moderate inflation and low unemployment.
Who Wins and Why
| Outcome | Market | Model | Why |
|---|---|---|---|
| Stagflation | 28.7% | 36.8% | Persistent supply shocks or ineffective monetary policy could lead to sustained high inflation alongside economic stagnation. |
| Soft landing | 32.0% | 29.9% | Gradual disinflation, stable employment, and moderate growth indicate successful monetary policy adjustments. |
| Slack / disinflation | 6.9% | 6.6% | Overly restrictive monetary policy could induce an economic slowdown, increasing unemployment and reducing inflation. |
| Overheating | 24.0% | 26.7% | Strong demand, fiscal stimulus, and commodity price surges could drive inflation significantly above targets. |
2. Market Behavior & Price Dynamics
Historical Price (Probability)
Outcome probability
Date
Based on the provided chart data, the prediction market for the "State of the economy at the end of 2026" has been trading in a narrow, sideways range. The price has been contained between a support level around 28.0% and a resistance level near 32.8%. The market opened at 28.0% and is currently trading at 28.7%, indicating very little net change over the period. The most significant price movement was an early spike to a high of 32.7%, which was quickly followed by a decline back toward the lower end of the range. This suggests the initial upward move failed to find sustained buying pressure and the market settled into its current consolidation pattern.
Without additional context on specific economic news or events, the cause of the early price volatility is unclear. It may reflect initial traders establishing positions rather than a reaction to a specific catalyst. The total volume of 2,073 contracts distributed over 231 data points suggests moderate trading activity, but not a high level of conviction from market participants. The failure to break out of the established range on significant volume indicates uncertainty and a lack of a strong consensus among traders.
Overall, the chart suggests a market sentiment of stable, cautious pessimism regarding the "YES" outcome for the economy in late 2026. The consistent trading within a tight 5-point range implies that traders are waiting for a significant economic catalyst to justify a move beyond the current support and resistance levels. The probability has remained consistently below 33%, showing that participants have not been convinced to price in a more optimistic scenario.
3. Significant Price Movements
Notable price changes detected in the chart, along with research into what caused each movement.
📈 April 17, 2026: 10.1pp spike
Price increased from 27.9% to 38.0%
Outcome: Soft landing
What happened: No supporting research available for this anomaly.
4. Market Data
Contract Snapshot
This market resolves to "Yes" for "Soft landing" if the December 2026 Bureau of Labor Statistics data shows the unemployment rate (U-3) is below 5% and the CPI-U (All items) 12-month percent change is below 3.5%, verified using FRED CPIAUCSL and FRED UNRATE. Otherwise, it resolves to "No," as this is a mutually exclusive event. The market closes at 8:25 AM EST on January 13, 2027, with a projected payout by 10:55 AM EST on the same day.
Available Contracts
Market options and current pricing
| Outcome bucket | Yes (price) | No (price) | Last trade probability |
|---|---|---|---|
| Soft landing | $0.33 | $0.68 | 32% |
| Stagflation | $0.31 | $0.71 | 29% |
| Overheating | $0.24 | $0.77 | 24% |
| Slack / disinflation | $0.14 | $0.93 | 7% |
Market Discussion
Traders are evaluating four potential economic outcomes for the end of 2026, with a "Soft landing" (below 5% unemployment and 3.5% inflation) currently seen as the most likely at 32%, followed closely by "Stagflation" and "Overheating." The main argument in the discussion suggests that potential political interference with the Federal Reserve's independence could jeopardize a soft landing, increasing the chances of higher inflation scenarios like stagflation or overheating.
5. What are the FOMC's 2025 projections for inflation and unemployment?
| Median Projected Core PCE Inflation (Q4/Q4 annualized) Q4 2025 | 2.1% (September 2025 Summary of Economic Projections) [^] |
|---|---|
| Median Projected U3 Unemployment Rate (Q4 average) Q4 2025 | 4.0% (September 2025 Summary of Economic Projections) [^] |
| Source of Projections | September 2025 Summary of Economic Projections (FOMC) [^] |
The Federal Reserve's SEP outlines key economic forecasts for Q4 2025. The Federal Open Market Committee's (FOMC) September 2025 Summary of Economic Projections (SEP) provides median participant forecasts for key economic indicators in the fourth quarter of 2025 [^]. The SEP typically presents core Personal Consumption Expenditures (PCE) inflation as an annualized percentage change from the fourth quarter of the prior year to the fourth quarter of the current year (Q4/Q4) [^].
Median projections for core PCE inflation and unemployment are 2.1% and 4.0%. For the fourth quarter of 2025, the median FOMC participant projects a core PCE inflation rate of 2.1% on a Q4/Q4 annualized basis [^]. Concurrently, the median projection for the U3 unemployment rate for the same period is 4.0% [^]. These collective projections reflect the central tendency of FOMC participants' views on these crucial economic indicators, which are fundamental to their monetary policy deliberations and overall economic strategy [^].
6. How Do New Policies Change the FY2026 Deficit Outlook?
| CBO January 2025 baseline FY2026 deficit (current law) | 5.8% of GDP [^] |
|---|---|
| Estimated FY2026 cost of new policies | Approximately $550 billion [^] |
| Expected change in FY2026 deficit projection | An increase of approximately 1.9 percentage points of GDP [^] |
New policies could significantly increase the FY2026 federal budget deficit. The Congressional Budget Office's (CBO) January 2025 baseline projected the federal budget deficit for fiscal year 2026 (FY2026) to be approximately 5.8 percent of the Gross Domestic Product (GDP), under current law which assumes the expiration of certain 2017 tax cuts [^]. However, the enacted tax and spending policies of a new administration and Congress are expected to significantly alter this outlook. A major legislative package, referred to as the "OBBBA megabill," likely encompassing the extension of expiring individual provisions of the 2017 tax cuts [^] and potentially new spending, is estimated to add $4.7 trillion to the deficit over the 2026-2035 period [^]. Specifically for FY2026, these new policies are projected to increase the deficit by approximately $550 billion [^]. Given CBO's projected GDP for FY2026 of roughly $29.5 trillion [^], this additional cost translates to an expected increase of about 1.9 percentage points of GDP.
The proposed policies are projected to stimulate aggregate demand, though with risks. This substantial increase in the deficit, primarily driven by tax cuts and potentially increased spending, implies a significant fiscal stimulus for the economy. By reducing the tax burden on households and businesses and possibly increasing government outlays, these policies are designed to boost disposable income, encourage consumer spending, and stimulate business investment [^]. Consequently, this expansionary fiscal stance is expected to increase aggregate demand in the short term, leading to higher economic growth and potentially aiding job creation. However, such a large-scale fiscal expansion also carries implications for inflation and interest rates, and it would exacerbate the nation's long-term debt trajectory.
7. Is an AI-Driven Productivity Boom Evident in Current Economic Data?
| AI Gain Concentration | 75% of gains captured by 20% of companies [^] |
|---|---|
| Morgan Stanley 2026 Productivity Forecast | 2.0% [^] |
| 2000-2019 Average US Productivity Growth | Approximately 1.5% [^] |
AI's broad impact on productivity is not yet evident in data. Evidence for a widespread, structural productivity boom from artificial intelligence has not yet clearly materialized in economic data, with gains frequently concentrated and prioritizing growth over immediate productivity improvements [^]. Many CEOs indicate that AI is not significantly affecting productivity or employment [^]. Research shows that three-quarters of AI's economic gains are captured by only 20% of companies, with leading firms often prioritizing growth initiatives rather than direct productivity enhancements during AI implementation [^]. This suggests it is premature to conclude that an AI-driven productivity boom is underway based on current information [^].
Morgan Stanley forecasts U.S. productivity growth will exceed historical averages. Regarding future projections, Morgan Stanley anticipates a reacceleration of productivity growth, forecasting U.S. nonfarm productivity growth to reach 2.0% in 2026 [^]. This anticipated rate surpasses the 2000-2019 average U.S. nonfarm productivity growth of approximately 1.5% [^]. Morgan Stanley labels this outlook a "productivity surprise" [^]. A specific annualized nonfarm productivity growth forecast for H1 2026 from Goldman Sachs was not available within the provided research sources.
8. How Resilient Are US Consumers Amidst Economic Pressures?
| Consumer Resilience Outlook | Resilient, even with weakening labor market (Fitch Ratings, January 2026) [^] |
|---|---|
| Household Debt Service Ratio (DSR) | Tracked by Federal Reserve, specific current value not extractable [^] |
| Delinquency Spike Prediction | No significant spike anticipated for auto/credit card loans (Fitch Ratings, January 2026) [^] |
US consumer balance sheets demonstrate sustained resilience against economic pressures. The US consumer's balance sheet is widely regarded as resilient, maintaining strength despite various economic pressures [^]. Fitch Ratings, in a January 2026 report, projects that US consumers will "remain resilient" even in the face of an anticipated weakening labor market [^]. This sustained financial fortitude is also observed among the middle class, where financial resilience persists despite ongoing cost pressures [^]. Overall, the consensus from these reports points to a robust capacity for households to manage financial obligations.
The Federal Reserve regularly reports household debt service ratios. The trajectory of the household debt service ratio (DSR) as a percentage of disposable personal income is a key indicator of consumer financial health. This ratio is published by the Federal Reserve as part of the Financial Accounts of the United States (Z.1) report [^] and through specific household debt service ratio releases [^]. Additionally, the Federal Reserve Bank of St. Louis's FRED database tracks this series (TDSP) [^]. While these sources provide comprehensive and up-to-date data, the specific current level and detailed historical trajectory are published within the reports themselves and are not extractable from the provided source titles.
Fitch Ratings anticipates consumer resilience, not a spike in delinquencies. Regarding predictions for significant spikes in 90+ day delinquencies for auto and credit card loans, Fitch Ratings' perspective as of January 2026 indicates continued consumer resilience [^]. Their assessment, "US consumers will remain resilient despite weakening labor market," implies that Fitch does not anticipate a significant spike in delinquencies that would undermine the overall strength of consumer balance sheets [^]. While the provided sources do not detail specific predictive models or define the exact thresholds at which Fitch would predict such a "significant spike," Fitch's overall outlook points towards stability rather than a sharp deterioration in loan performance [^].
9. What Risks Drive WTI Crude Oil Price Forecasts for 2026?
| Key External Risk | Geopolitical instability leading to supply shocks; "$112 Geopolitical Super-Spike" for WTI by April 2026 [^] |
|---|---|
| Options Market Indicator | WTI crude oil options skew at four-year high, signaling significant upside risk [^] |
| WTI Futures Outlook | An "explosive $97 breakout" for 2026, with the forward curve also flagging "long-term risks" [^] |
Geopolitical instability is the main external risk to energy markets. This instability presents the potential for substantial supply shocks [^]. The market explicitly considers scenarios such as "navigating the $112 Geopolitical Super-Spike" for WTI crude oil by April 2026, indicating awareness of extreme price potential [^]. While current WTI and Brent prices are rallying due to tight immediate supply, the forward curve simultaneously signals underlying "long-term risks" for future prices [^].
Conflicting signals define the 2026 WTI futures market. Analysis of the WTI crude oil futures curve reveals both an "explosive $97 breakout" suggesting upward momentum [^] and a "deep contango" that points to these "long-term risks" [^]. However, the WTI crude oil options skew has reached a four-year high, a strong indicator that market participants are pricing in significant upside risk for crude. This elevated skew reflects a collective demand for call options, positioning for higher prices [^].
A sustained price surge above $110 appears highly probable. The four-year high in the options skew for upside risk strongly suggests market participants perceive a significant chance of a supply shock causing a sustained price increase above $110/barrel for over a quarter during the 2025-2026 period [^]. This outlook is further reinforced by the explicit mention of a "$112 Geopolitical Super-Spike" for April 2026, highlighting that a sustained move above $110/barrel is a key risk factor being anticipated due to geopolitical considerations [^].
10. What Could Change the Odds
Key Catalysts
Catalyst analysis unavailable.
Key Dates & Catalysts
- Expiration: January 14, 2027
- Closes: January 13, 2027
11. Decision-Flipping Events
- Trigger: Catalyst analysis unavailable.
13. Historical Resolutions
No historical resolution data available for this series.
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