Editor’s Note: In our final issue of the year, we take a look at what we got right…and what we didn’t. For those celebrating Christmas, we hope it is truly merry. Best wishes for 2026 to all!
One of my favorite country tunes is Vince Gill’s “One More Last Chance.” In it, he pleads with his wife to grant clemency for his serial habit of spending nights out with the boys.
I had a recording of that song ready for my year-end discussion with my boss, at which I had to present a comparison of our forecasts for the year with what actually happened. Fortunately, our outlook for 2025 was pretty accurate, and our analysis of conditions has generally proven prescient. I didn’t have to plead with him for one more last chance.
That said, there were a handful of developments that didn’t align with our expectations. These were our calls that fell short:
Tariffs will upend economic activity. Early in the year, firms had the foresight to stock inventory, delaying the higher costs of the tariffs. Exemptions have been granted to a broadening range of goods. Canadian exporters rushed to have their products certified as compliant with the U.S.-Mexico-Canada Agreement (USMCA), so they could enter the United States tariff-free.
As a result, tariffs have not yet had the drag on activity or spike to inflation that were feared. Tariffs have also not had a noticeable upside impact on the reshoring of industry to the United States, nor on manufacturing employment.
Some tariff-related outcomes may be slow in developing, hitting with additional force next year. But the year’s biggest story has had a bigger effect on headlines than it has on the economy.
- Global trade wars would hinder China’s exports, forcing the regime to stimulate demand. China’s trade surplus surpassed $1 trillion in the first eleven months of this year, an all-time record. While some exports to the United States have flagged, demand from the rest of the world has compensated.
This still leaves China’s economy out of balance, with domestic consumption weak and deflation taking deeper root. Chinese officials met again recently to discuss policy, but once again declined to offer demand-side stimulus.
China has also played a surprisingly strong hand in negotiating with the U.S. We suspected that China’s desire for leading-edge microchips would force it to make concessions at the bargaining table. But we underestimated the leverage provided by China’s stronghold on rare earth minerals. The two countries are at a virtual stalemate when it comes to materials essential to advanced technology.
- A tightly divided Congress would limit the U.S. administration’s ability to implement significant policy changes. Despite a thin majority, Republican leadership in the House of Representatives was able to keep its caucus in line. This facilitated passage of The One Big Beautiful Bill Act, a sweeping fiscal package that will have significant economic and financial consequences. And the legislature has not checked the more expansive actions of the executive branch, especially with respect to tariffs and immigration.
We had also assumed that the bond markets would limit the fiscal ambitions of the White House, but investors have been patient amid huge volumes of debt issuance. As of this writing, the yield on the 10-year U.S. Treasury note is about 40 basis points lower than it was at the start of the year. While our forecasts for most variables were quite close, this was the biggest miss.
