By Randy Myers
The U.S. economy has been a powerhouse over the past several years and will likely keep growing into 2026—though perhaps at a slower pace. That was the message from Sarah Hirsch, global market strategist at New York Life Investments, in remarks at SVIA’s Fall Forum in early October. She said most economists expected the economy to cool in 2025 as consumer spending slowed after several years of rising faster than wages and inflation. “That doesn’t mean we expected a recession, but it did mean we expected U.S. GDP growth closer to 2% than 3%,” she noted.
The first quarter seemed to support that view. Consumer spending softened and GDP contracted at a 0.5% annual rate. But the second quarter surprised to the upside, with GDP growing at a 3.8% rate and spending rebounding—possibly as households pulled forward purchases in anticipation of higher prices from new tariffs. Hirsch also highlighted a shift in who is doing the spending: high earners have recently accounted for about half of all consumer outlays, up from roughly a third in the past. That concentration is not alarming by itself, she said, but it bears watching because it can leave growth more sensitive to swings in asset prices. “All to say that what economists expected coming into 2025—slower growth—is really not what we’ve seen in the data thus far,” she said. “But that doesn’t mean it’s not going to show up eventually.”
Hirsch pointed to several policy areas shaping her team’s outlook: taxes, immigration, deregulation and trade. On taxes, she expects the recent extension of provisions from the 2017 Tax Cuts and Jobs Act—via the “One Big Beautiful Bill Act”—to support demand at the margin. Businesses may have more incentive to invest in equipment and research, and households could see larger refunds that lift spending in early 2026. The long-term tradeoff, however, is a wider federal deficit. Citing Congressional Budget Office estimates, she noted the package could add about $3.4 trillion to the deficit over ten years relative to the current law baseline. That’s meaningful at a time when interest on the debt has become the government’s largest outlay and the average interest rate on outstanding debt is well above pre-pandemic levels.
Even so, Hirsch said some revenue sources could offset a portion of that cost. Tariff receipts could reach $300 billion to $400 billion a year under current policies, and her team’s debt-sustainability work suggests near-term risks are manageable. “Higher debt levels and higher costs of debt … are raising some eyebrows,” she said. “But at the end of the day, as long as there’s somebody who is willing to purchase that debt, we don’t see a concern anywhere in the near term.”
Immigration policy feeds directly into the labor picture. With immigration slowing, Hirsch expects the number of jobs needed each month to keep the unemployment rate steady to be much lower than in recent cycles—perhaps around 20,000. That helps reconcile modest payroll gains with a still-low unemployment rate. A tighter labor supply could also put upward pressure on wages and, over time, on inflation. “We haven’t seen that [wage pressure leading to inflation] yet,” she said, “but it’s something we’re keeping a very close eye on.”
Trade policy is the wild card with a long fuse. Hirsch expects the effective tariff rate on U.S. imports to settle in the 10%–20% range for an extended period, likely closer to the high end. She believes markets have not fully priced that in.
“We believe the economy and markets will need to price in tariffs once we see a much more visible hit to the real economy,” she said. “And that might not be for another six to nine months. But we are starting to see some impacts.”
Among those early signs: faster price increases for electronics, furniture, and apparel since April; a notable slowdown in hiring; and weakening consumer sentiment. Over the next two to three quarters, she expects growing pressure on inventories, margins, and capital-spending plans.
“Ultimately, we think tariffs are going to modestly increase inflation and cause growth to slow very slightly,” she said. “Some of that will be offset by the One Big Beautiful Bill and deregulation. But in the near term, we really do think that the economy is going to continue to kind of slow. It does not mean that we expect a recession. It doesn’t mean that we expect the unemployment rate to rise precipitously, but it is something that we are looking out for.”
That backdrop helps explain the Federal Reserve’s move in September, when it cut the federal funds rate by 25 basis points to a 4.00%–4.25% range—the first cut since December 2024. Hirsch sees the labor market as the main driver of that shift and expects three or four additional cuts over the next year toward a neutral policy rate near 3.5%. She also cautioned that longer-term Treasury yields may remain high because of persistent inflation pressures and heavy Treasury issuance.
Finally, Hirsch outlined four investment themes she and her team view with conviction:
- Diversification is back in focus. After coming into 2025 overweight U.S. assets, global allocators have renewed interest in non-U.S. assets. That doesn’t imply a wholesale rotation away from the U.S., which remains central for growth, innovation, and potential returns; rather, it argues for broader geographic exposure.
- Rates and inflation are likely to remain higher than in the 2010s. Elevated fiscal deficits and ongoing issuance point to firmer long yields, while tariffs and a tighter labor supply could keep inflation elevated.
- Capital-intensive megatrends are reshaping investment needs. Artificial intelligence (and the power-grid build-out it requires), increased defense spending, and supply-chain reshoring will continue to drive capital investments.
- Interest in private markets remains strong—but selectivity matters. Institutions and high-net-worth investors continue to seek private-market exposure, with growing discussion about how, or whether, such assets might fit in defined contribution plans. Hirsch cautioned that selectivity will be important for investors moving into private markets, which aren’t as highly regulated, transparent or liquid as public markets.
Overall, Hirsch described an economy that is likely to bend, not break. Growth should ease from its earlier pace without collapsing. Inflation may prove stickier than before the pandemic. And policy will matter, with its effects arriving with lags.