Dissecting the 2025 K-Shaped Economy and What’s Up for 2026
Kevin M. Bahr CBEI Chief Analyst; Emeritus Professor of Business Sentry School of Business and Economics
As 2025 comes to an end, it’s a mixed bag for the U.S. economy. Tariffs played the central role in shaping U.S. economic policy in 2025, and the long-term impact of tariffs is yet to be realized. 2026 features much uncertainty surrounding tariffs, namely legal issues, tariff implementation, and economic effects. By historical standards, the unemployment rate remained relatively low, but the labor market softened and the unemployment rate increased. October job losses hit a 22-year high for the month of October. While the overall employment rate was relatively low, different sectors faced varying challenges, with the unemployment rate for young people approaching 10%. Although consumer spending continued to drive economic growth, increases in consumer spending were significantly greater for higher income households relative to lower income households. An evolving “K-shaped” economy widened the income and wealth differential of upper- and lower-income households, and increased the importance of dissecting any overall economic number or policy. The softening labor market and impact of tariffs raises the uncertainty for consumer spending in 2026. The record long government shutdown that began in October adversely impacted consumer spending and placed additional stresses on a variety of groups, particularly lower-income households and federal workers. Driven by AI, the U.S. stock market continued to roll along and hit record highs, despite economic uncertainties. However, in a significant contrast with previous years, many foreign stock markets outperformed the U.S. market. The softening labor market spurred the Federal Reserve to cut interest rates, despite an uptick in inflation and the long-run uncertainty of the impact of tariffs on prices. 2026 brings economic uncertainty unlike no other year. The Supreme Court will make a decision on the legality of tariffs in 2026, raising the uncertainty over tariff policies and their economic effects. 2026 will also likely bring a greater influence over monetary policy by the Trump Administration with the end of Jerome Powell’s term as Fed Chair and changing fiscal programs. In addition to the uncertainties regarding consumer spending, the labor market, and economic growth, 2026 will likely feature the continued evolvement of the K-shaped economy. Tariffs and Trade Tariffs dominated the U.S. economic landscape in 2025. A tariff is basically a tax paid by a business to the U.S. government for importing goods from a foreign country. Tariffs are paid by the business importing the goods, not the foreign country sending the goods to the United States. Tariffs are a regressive tax, hitting lower and middle- income Americans to a greater degree than wealthier Americans, as lower and middle-income Americans spend a greater share of income on goods and buy relatively lower cost, imported goods to a greater degree. Tariffs typically lead to higher retail prices as importers try to pass on (at least some of) their higher costs onto consumers. Tariffs represent an increase in the government regulation of international trade and impact financial markets. In 2024, U.S. imports and exports of goods totaled approximately $3.3 trillion and $2.1 trillion, respectively. With the U.S. population at approximately 340 million, import product demand was nearly $10,000 per U.S. resident. Prior to 2025, global tariff rates were relatively low since early this century. The weighted mean tariff rate has generally been below 5% for most countries since 2010. A brief spike in the U.S. rate occurred in 2019 due to Trump Administration initiated tariffs, but trade wars rescinded in 2020 and tariff rates declined. The U.S. mean tariff rate had spiked to 13.8% in 2019 but declined to 1.5% in 2020. The era of relatively low tariffs changed in 2025, when the United States increased tariff rates on imports from trading partners primarily based on U.S. trade deficits.
Central Wisconsin Report - Fall 2025
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