Stagflation? Recession? We Asked A Former Fed Advisor About The US Economy In 2026

While there has been plenty of dialogue, debate, and even predictions for the U.S. economy in 2026, many of the signals that might indicate the onset of certain economic trends have not quite panned out as anticipated. While stagflation, or even a recession, were both presented as potential economic swings for the U.S. in 2026, as of July, neither seem to be on the immediate horizon (though they aren't counted out entirely either).

We asked Joseph Tracy, previously at the Federal Reserve Bank of Dallas, and current nonresident senior fellow at the American Enterprise Institute and a Distinguished Fellow at Purdue University's Mitch Daniels School of Business, about the state of the U.S. economy in 2026. Despite the burden of tariffs on consumers, and even the increase in popular food item prices, Tracy argues that the U.S. economy isn't so bad. He explained, "The U.S. economy has performed relatively well given all of the supply shocks from tariffs, the immigration crackdown and the ongoing conflict with Iran." He also explained that some of the primary metrics that agencies like the Federal Reserve use to monitor the economic health of the country have been similarly positive, "While the Fed was concerned last year about potential weakening in the labor market, the unemployment rate has remained relatively steady."

However, despite this outlook, many economists argue that the U.S. is not quite out of the woods yet, with certain metrics like growth, employment, and even inflation rates fueling growing concerns over future economic problems.

For those wondering why the economic concerns of, say, a year ago haven't quite played out yet, it can be important to understand the specifics of economic conditions like inflation and stagflation -– as well as the metrics used to measure them. For starters, Joseph Tracy explained to us that, "Stagflation is a term used for an economy that is suffering from a combination of slow economic growth and high inflation." That said, Tracy emphasized that this combination is rather unusual. While the U.S. experienced particularly weak growth in Q4 2025, things have picked up slightly in 2026. Plus, it's worth noting that many economists point to resilient corporate profits as a primary metric for why the U.S. is not currently experiencing stagflation, with the historic AI bubble serving as a significant portion of the U.S.' supposed GDP growth.

As for a recession, Tracy explained that "Typically, during a recession inflation moderates (and in some cases becomes negative, i.e. deflation)." Given how persistent inflation has been (with inflation at 3.5% as of June 2026, per the Bureau of Labor Statistics or BLS), deflation is something that consumers might actually welcome with some relief in 2026, even if only in a short term way. That said, a recession is largely an indication of a declining economy, and while the U.S. may have some concerning signs on the horizon for a bumpy road, it is not yet in declining territory yet.

All said, some experts argue that while the U.S. economy has remained resilient so far in 2026, it is beginning to show signs of strain that could still indicate potential stagflation conditions are coming. The previously mentioned slowing growth (as well as the concentration of growth in the tech sector), coupled with the growing tension between prices and employment (with unemployment sitting around 4.2%, as of June 2026, per the BLS) could serve as warning signs for worse future economic conditions. However, none of these factors have hit a decisive tipping point just yet, leaving the possibility still out there but not guaranteed.

With that in mind, we asked Joseph Tracy about some of the best ways a person can protect their investments in today's current economic environment. Tracy told us, "A good overall strategy is to invest in broad equity market funds. Over long periods of time, the equity market has generated the highest returns." Perhaps the best thing about this advice is the almost immediate diversification that can come from it, allowing you to spread your money across a wide cross-section of the stock market (thereby avoiding the risks inherent in putting too many eggs into a singular company's basket). Plus, diversification is one of the investment strategies that the world's wealthiest people have in common.