Viewpoints: January 2026

US voters have not waited for midterm elections—or even a full year—to register their dissatisfaction with Donald Trump’s turbulent return to office. In November last year, Democrats swept key state races in New York, Virginia, and New Jersey. The message from voters was unmistakable: rising living costs and the impact of higher import tariffs are biting hard.

The affordability crisis is already reshaping America’s political landscape. The Financial Times examined the soaring cost of living in New York and the unexpected election of Zohran Mamdani, the 34-year-old Democrat to the office of the mayor. The numbers tell a stark story. Average childcare costs approach US$1,450 per month, yet only 14.5% of New York families can afford them. More than half of renter households spend at least 30% of their income on rent, and between 60,000 and 80,000 New Yorkers sleep in shelters every night.

And New York is far from an outlier.

Recently, a close friend visited us from Boston, and conversation inevitably turned to expenses. Even mundane purchases now come with sticker shock. A simple lunch—sandwiches for two—costs US$30 to US$35. When her German Shepherd needed an X-ray, the bill came to US$1,300; a CT scan was offered for US$3,000. Removing 11 trees from her garden cost US$9,000. She and her husband work in finance and are relatively affluent, so these examples are anecdotal—but they vividly illustrate how sharply costs have risen across the US.

When she insisted on picking up the lunch tab during her visit to the UK, we did not feel too guilty. At £54 with wine (US$71), it was a bargain, even after accounting for the US dollar’s depreciation against sterling.

Both the Financial Times article and these conversations raise important questions. How widespread is the cost-of-living squeeze? How much pressure is Trump under to deliver on his MAGA agenda? And how constrained is the Federal Reserve as it balances rising inflation against already-stretched households?

Income and Spending: A Divided Country

In 2024, the average American took home US$64,426 after taxes, according to data from the Bureau of Economic Analysis (Figure 1). Per capita disposable income exceeded that level in just 18 states. The District of Columbia topped the list at US$92,365, followed by Connecticut at US$80,694. In contrast, residents in 33 states earned less than the national average. Mississippi ranked last at US$47,831, with West Virginia close behind at US$50,444.

If you rely on the GDP estimates from the Federal Reserve Bank of Atlanta's team, the US economy is performing the improbable by growing well beyond its potential, despite two key sectors experiencing no growth and minimal new job creation. The Atlanta Fed's GDPnow estimate suggests that Q4 GDP growth is at an annualized rate of 5.1%. However, that estimate of output growth is at odds with the weak growth picture depicted by data from manufacturing, housing, and employment. That data indicates that GDP growth is occurring at, at best, half the rate.

The US economy is composed of three primary sectors: goods, structures, and services. The Federal Reserve's industrial production metric shows that manufacturing output in Q4 through November is lower than in Q3, suggesting minimal, if any, growth in goods output for Q4.

The structures component includes three sectors: housing, nonresidential, and state and local. Housing starts in October are significantly below the Q3 average, indicating a decrease in residential construction activity. Nonresidential construction has been weak throughout 2025, with data indicating a decline in Q4. Meanwhile, state and local construction spending shows minimal growth. Thus, the structures component is likely to weigh on Q4 GDP.

This leaves the service sector, the largest of the three. The service sector doesn't seem to be expanding rapidly enough to support the GDPNow estimate either. For instance, private sector service job growth amounted to just 112,000 in the three months ending in December.

Moreover, for the GDP output to increase by more than 5%, the income side must show a similar rise. However, the data on jobs, wages, and hours indicate a very modest increase in labor income in Q4. To align with the GDP output growth estimate, there would need to be an extraordinary increase in operating profits to offset the weak labor income. Companies would have to register a record increase in margins to do that, which is unlikely given the price data.

The government shutdown, which lasted over 40 days, affected and delayed several economic reports to such an extent that it's currently very challenging to obtain a reliable assessment of the Q4 economic performance. Nevertheless, if the data on jobs, manufacturing, and housing accurately represent the situation, then GDPnow is more than 50% off.

November was another soft month for state labor markets. No state had a statistically significant change in payroll employment, though the raw increases in California (32,500). New York (17,100), as well as the decline in Illinois (9,700) look to be of some note. However, no state appears to have had a change as large as .2 percent. In the October numbers, the federal cuts were reflected in large, most likely statistically significant, drops in DC, Maryland, and Virginia.

State unemployment rates in November were generally, though not universally, higher in November than in September (there are no unemployment figures for October, due to the federal government shutdown). Delaware and West Virginia’s unemployment rates were .4 percentage points higher in November than in September, and a number of other states saw increases of .3 percentage points. Hawaii’s rate dropped .3 percentage points. The highest unemployment rates were in DC (6.5%), California (5.5%), New Jersey (5.4%), Nevada (5.2%), New Jersey (5.2%), Oregon (5.2%), and Michigan (5.0%). Alabama, Hawaii, North Dakota, South Dakota, and Vermont had unemployment rates under 3.0%, while South Dakota’s 2.1% was the lowest in the nation.

Puerto Rico’s unemployment rate was unchanged at 5.7% (remarkably, there is an October unemployment rate estimate for Puerto Rico) and the island’s job count rose by 1,700.