Monthly Economic Insights
Looking back at 2025: Housing, inflation, and jobs, and what to watch in 2026
As we near the end of the year, this is a natural time to review the factors that have contributed to the gradual reset of the U.S. economy.
Housing markets moved closer to balance, inflation stayed contained but stubbornly above target, and the labor market cooled without tipping into recession. Compared with the volatility of recent years, 2025 was less about sharp turns and more about slower normalization, setting the stage for a more measured outlook heading into 2026.
Inflation made progress in 2025, but not a clean return to target
At the beginning of the year, inflation was running at roughly 2.9% year over year, still above the Federal Reserve’s 2% goal but far below the peaks seen in recent years. Inflation drifted modestly lower in mid-year, helped by stable goods prices and resilient supply chains. However, progress proved uneven, and by early fall, inflation ticked back up to around 3.0%, reflecting lingering pressure from shelter and services costs.
As we reach year-end, inflation remains near 2.9%–3.0%, signaling that price pressures are contained but not entirely under control. The broader takeaway from 2025 is that inflation is no longer accelerating, but it has also proven challenging to push decisively below 3% without further economic cooling.
The labor market calmed down
At the start of 2025, the unemployment rate stood at approximately 4.0%, and employers were still adding jobs at a healthy pace. As the year progressed, hiring slowed, job openings declined further, and wage growth moderated, shifting leverage gradually back toward employers.
By early fall, unemployment had risen to about 4.4%, its highest level in several years, though still low by historical standards. Even so, layoffs remain contained, and job growth, while slower, has stayed positive. In short, the labor market cooled in 2025, but it did so in an orderly way, avoiding the sharp downturns markets had feared.
Interest rates remained elevated for much of 2025 before easing this fall
The year began with the federal funds rate at 4.25%-4.50%, keeping borrowing costs high for consumers, developers, and businesses. For much of 2025, the Federal Reserve held rates steady, emphasizing caution as it monitored inflation and labor-market trends.
In total, rates were cut by roughly 75 basis points in 2025. The most recent cut this past Wednesday of 25 basis points lowered the federal funds target range to approximately 3.50%–3.75%, marking the lowest level in several years. While rates remain well above pre-pandemic norms, the shift signals a clear move away from restrictive policy.
Housing reflected both relief and looming constraint
For renters, 2025 extended the relief that began in late 2024. Markets such as Austin, Phoenix, Denver, Atlanta, and parts of the Midwest continued to see flat or declining rents as the wave of multifamily deliveries peaked and vacancy rates edged higher. Renters enjoyed more breaks and deals than they had in years.
At the same time, new apartment construction slowed meaningfully as financing costs and underwriting standards tightened. That slowdown sets up a potential supply crunch in 2026 and 2027, particularly in high-growth markets where demand remains strong.
On the ownership side, affordability remained a challenge. Mortgage rates eased modestly but stayed elevated enough to constrain activity. Even so, single-family construction proved resilient, supported by limited resale inventory and builders’ use of incentives, smaller footprints, and rate buy-downs to keep projects moving.
Fed’s outlook provides additional clues
The Federal Reserve’s Summary of Economic Projections, released after the December 9–10 FOMC meeting, provides some additional insights. Policymakers expect moderate growth, with real GDP rising about 1.7% in 2025 and improving to 2.3% in 2026, while unemployment is projected at 4.5% at year-end 2025, before settling near 4.2% in the longer term.
Inflation is expected to continue easing, with PCE inflation around 2.9% in 2025 and moving back toward the Fed’s 2.0% target by 2028. Reflecting that gradual progress, the Fed’s projected policy path shows rates ending 2025 near 3.6% and declining slowly as the economy moves into 2026.
Bottom Line: 2025 was a year of normalization. Inflation stabilized near 3%, the labor market cooled without breaking, and interest rates began to ease after a prolonged period of restraint. As we look ahead to 2026, the focus will shift to timing—how quickly rates decline further, how housing supply responds, and how businesses and households adapt to a more balanced economic environment.
— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company, a division of FNBO.
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