Mark Schniepp
February 2026
I asked Gemini what the key economic issues are in 2026. Here’s what it said: “Today’s economic landscape is dominated by questions related to monetary policy, global trade and affordability . . .”
Then it proceeded to list seven principal concerns, and my response—the human response—follows each question.
Inflation & Monetary Policy: Will inflation remain stubbornly elevated, necessitating higher-for-longer interest rates, or will productivity gains allow for further normalization?
Human response: Inflation is not elevated now. It is not in steady decline either, and it is moving more so in a lateral fashion. Interest rates are higher because of this. Productivity this year from AI will definitely enable short term rates to be lowered and inflation to push in the direction of the Fed’s 2.0 percent target.
Economic Affordability: Can income keep pace with the rising cost of living, particularly for middle-income households, and how will consumer demand hold up?
Human response: Currently, wages and salaries have kept just above the consumer cost of living pace, for not only middle income households but for lower income households as well. Will this continue during 2026? Yes. There will be fewer people employed in 2026 but continued wage growth exceeding inflation due to productivity gains.
Trade Policy & Tariffs: What will be the long-term impact of new tariffs and restrictive immigration policies on consumer prices and global trade tensions?
Human response: The impact is occurring now. There is some pressure on the Producer Price Index, which has moved higher over the last few months. Although economists are not certain, there is speculation that tariffs are pushing prices of imported goods higher. There is simply not much clear evidence yet that tariffs are impacting consumer prices, but higher producer prices tend to drive prices of final goods to consumers higher.
Don’t worry about global trade tensions. That ship has sailed. Now producers of goods are learning how to navigate the current tariff structure. The year will be one in which governments and foreign producers acclimate to the current tariff environment now in place.
Labor Market Health: While the overall market remains stable, will the creeping increase in unemployment significantly impact entry-level workers?
Human response: It already has impacted entry-level workers. The unemployment rate for 20 to 24 year olds (high-school, community college and 4 year college graduates) continues to rise. The rate for older workers 25 and above is quite stable.
California
During 2025, the job creation in California was limited at just 55,000—all due to the healthcare and local government sectors. Employment in all other sectors of the labor market declined. The unemployment rate climbed to 5.5%. UCLA projects a similar rate in 2026, before the labor market starts tightening again in 2027.
Much of the recent weakness is due to the state’s technology sector, which is no longer the major driver of job creation that it was prior to 2023. Although much has been made about the current AI boom that is driving billions of dollars of investment, there is no clear job boost occurring.
While AI (and 75% of all investment in AI in the U.S. is based in California) is expected to power the next wave of growth in tech, AI adoption, implementation and proven results take time. A large share of firms are still navigating how to integrate AI into their operations, and the associated job creation will likely have to wait until 2027. Job formation in the form of developing, maintaining, and overseeing AI systems is expected. New opportunities have and will continue to emerge in AI engineering, data science and data adaptation, AI training, AI ethics, and AI safety specialists.
Fiscal Sustainability: How will the U.S. and other nations manage record debt levels that are currently threatening long-term global growth?
Human response: I hate when anyone (or anything) leads with the word “sustainability.” It is overused, akin to the word “existential.” The more important claim here is “threatening” because in the U.S. now, growth does not appear to be hindered by our rising debt. However, the continuation of this trend will keep longer term interest rates higher and growth lower than potential unless it is managed and with some clear progress visible. Treasury Secretary Scott Bessent knows this well, and he believes the U.S. will “grow” its way out of debt. It does not appear at all that Congress has the will to do much about this from the spending side. Consequently, until the situation worsens into a wake up call, we remain vulnerable to higher inflation, less private investment, less growth, and less job creation.
Economic Inequality: How can policy address the widening gap between the top 10% and the rest of the population, a long-term issue gaining increased attention?
Human response: Usually the stock response is implementing more progressive income taxes, raising the minimum wage, or increasing budgets for public education including apprenticeship programs. But all of these “solutions” have been put in place many times and in many forms over the last 75 years. Public education has been the biggest failure and taxation policies will be both unpopular and avoided. I just don’t like government programs because they seldom work and create unintended consequences. Educating the workforce with meaningful and needed vocational direction will be the longest lasting solution towards reducing the inequality gap if we can find a mechanism to incentivize the private sector to prioritize this.
AI and Productivity: Will Artificial Intelligence investments drive sustainable productivity gains or create a “show me the money” bubble?
Human response: According to the Stanford Human-Centered Artificial Intelligence 2025 AI report, “AI business usage is accelerating: 78% of organizations reported using AI in 2024, up from 55% the year before. Meanwhile, a growing body of research confirms that AI boosts productivity and, in most cases, helps narrow skill gaps across the workforce.” ¹
Nevertheless, the consensus is now shifting towards a “show me the money” reckoning in 2026 where AI investment needs to justify its massive cost outlays. The AI bubble is now deflating. The high valuations of AI companies have been under pressure in the financial markets over the last three months. Since early November, my stock value index for AI companies Palantir, AppLovin, Constellation Energy, American Micro Devices and Nvidia is down 32 percent, and at the lowest aggregate valuation since early July 2025.
¹ https://hai.stanford.edu/ai-index/2025-ai-index-report
The California Economic Forecast is an economic consulting firm that produces commentary and analysis on the U.S. and California economies. The firm specializes in economic forecasts and economic impact studies, and is available to make timely, compelling, informative and entertaining economic presentations to large or small groups.
