Relatively positive outlook for 2026, says New Century Advisors' Sahm

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All right, well, 2026 is set to be a major year for the Fed. Samantha answered questions about monetary policy, future leadership, as we mentioned. Joining us now to talk about all of this and the economic outlook for next year, is Claudia Sam, a former Fed economist and chief

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economist at New Century Advisors. Claudia, it's great to have you as we close out the year. How's your outlook for next year shaping up?

Claudia Sahm (Chief Economist) 00:21.800

I think it's a relatively positive outlook. I, you know, there's there's still a lot of unanswered questions. I think particularly in the labor market we really need to transition out of this low hire labor market into one where we do see some hiring pickup. And and there is a

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potential and I think we'll learn a lot in the first half of the year. We've seen the Fed, you know, lower interest rates, trying to front load some of the insurance against a labor market deteriorating. And we do have some fiscal stimulus coming on early in the year with tax

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cuts for households and for businesses. So this will really we'll get I think some more clarity early in the year if we're going to get some oomph to to get the labor market going again. And that is critical for this being sustained growth. Not just like, you know, a couple

Claudia Sahm (Chief Economist) 01:06.480

quarters of really outsized GDP growth, but really to keep the ball moving forward.

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The consumer obviously important, but we were just talking about how your belief on AI is imperative to how you see the market next year. Also, the economy. I mean, in the in the GDP report last week, AI-related CapEx expanding at 6.3% annual rate. I mean, that that certainly

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gives the headline a pretty big lift and and shows that a lot of the growth is coming from all this investment in AI.

Claudia Sahm (Chief Economist) 01:34.880

Well, and I mean in terms of the lift and and growth, it was even larger in the first half of the year. So yes, the the investments that are being done are substantial. And you know, investment is kind of the physical investments, kind of the gift that keeps on giving in terms

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of growth because you get both the investment at the time that boost GDP, but the real payoff here is the ability to move the needle on productivity. And we have seen in this cycle productivity growth is higher than the prior cycle, but I mean we are at the very front end of AI.

Claudia Sahm (Chief Economist) 02:05.760

Now, I will say like I think there there's reason to be optimistic, but I'm not sure the optimism should be over say the next year, but we're talking about a 5-year, 10-year in terms of productivity. It is really, really hard to eke out even quarter percentage point growth in

Claudia Sahm (Chief Economist) 02:22.320

productivity gains. So, we'll we'll see.

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Well, yeah, the we'll see is important though, Claudia. I mean we're all trying to figure it out. out over this next year, as you say, even years to come. What are you going to be looking at to try to determine the impact and sort of get a sense in terms of the real time impact

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from from from AI in the enterprise.

Claudia Sahm (Chief Economist) 02:43.600

Right. So, I think the reality is that we're we're going we're wanting to see the use cases. And frankly, the aggregate statistics are not the first place that the productivity gains are going to show up, right? I mean, we are still going to be in the space of, you know,

Claudia Sahm (Chief Economist) 02:59.320

listening to the earnings report, listening to the use case studies, like trying to, you know, there's some really great survey work that like census is doing, going out and talking to businesses, like really trying to grasp the adoption rates and how that's spreading across

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different sectors. You know, so I just it's not one where I think, you know, we may get big, you know, GDP numbers from quarter to quarter, but tying that back to AI and and long-standing productivity gains, that's just going to be really tough. And I will, you know, point out

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that going into next year we We are still going to have a very disrupted data environment for our aggregate statistics. So I mean, we're having a hard time catching up on just what's happened in the economy in the last 3 months, let alone fundamental shifts under the hood in

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terms of productivity.

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So why is the unemployment rate rising?

Claudia Sahm (Chief Economist) 03:48.080

Yeah, that's a good question. It's It is unusual, you know, when we've we saw the unemployment rate really started moving up pretty steadily in the summer, and you know, that lines up exactly with a period where we saw, you know, consumer spending third quarter growth really,

Claudia Sahm (Chief Economist) 04:02.000

you know, topping the charts. And that that is not typical to see those two line up. Of course, timing is always pretty tough. Now, I will, one special factor that is a play this year is we we have had a pretty substantial downsizing of the federal government. It is not enough,

Claudia Sahm (Chief Economist) 04:19.440

you know, the layoffs in the federal government or the the downsizing, which is almost about 300,000 less in employment, which has happened very rapidly, that is nowhere near enough to explain the increase in unemployment. We're almost close to adding a million people to the

Claudia Sahm (Chief Economist) 04:32.400

unemployment roles, but it is a policy decision. It's not a cyclical weakening. Usually when we look at these small increases in the unemployment rate as being, you know, bad news, it's because Yeah it's the start of a cycle that's gaining speed and that's really talking about a

Claudia Sahm (Chief Economist) 04:51.680

business cycle. That's not talking about a policy decision to change the size of the federal government, which largely those reductions in force have taken place. So, I think we're kind of adding some extra noise to it. I'm not as concerned about it yet, but it is absolutely

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something to be watching.