As the U.S. economy navigates the tail end of 2025, a debate rages among economists and investors. On one side, skeptics like investment strategist Jim Paulsen warn of a “punk” economy teetering on weakness, citing outdated data, rising unemployment, and stock market signals like discount retailers outperforming luxury brands as harbingers of slowdown. Paulsen argues for aggressive Federal Reserve intervention to avert deeper trouble. But a growing chorus of optimists, backed by fresh data from Wall Street firms and federal trackers, counters that the economy is far more robust, poised for a “soft landing” where growth cools without tipping into recession. This view emphasizes sustained consumer spending, steady job markets, and proactive Fed policy as buffers against downturns.
Yet, even bulls acknowledge fragility: If policymakers fail to “stick the landing”, through missteps like overly tight monetary policy or disruptive trade tariffs, the odds of a 2026 recession could spike. Below, we explore the case for optimism, grounded in the latest indicators as of December 9, 2025, while highlighting the risks that could derail it.
Solid Growth Metrics Defy the Doom Narrative
At the heart of the counterargument is GDP performance, which continues to exceed expectations. The Atlanta Federal Reserve’s GDPNow model, a real-time tracker, estimates third-quarter 2025 growth at 3.5% as of December 5, down slightly from 3.8% earlier in the week but still well above the long-term trend of around 2-2.5%. This follows a robust 3.8% in Q2, painting a picture of acceleration rather than stagnation. Professional forecasters, including those at J.P. Morgan, project full-year 2025 growth around 2.5-3%, supported by productivity boosts from AI and tech investments. Far from “stuck around 2%,” as critics claim, these figures suggest an economy that’s “muddling through” with resilience, not fragility.
Consumer spending, which drives about 70% of GDP, remains a powerhouse. Holiday shopping data underscores this: The National Retail Federation reported a record 203 million shoppers over the Thanksgiving weekend, with Black Friday e-commerce sales hitting $11.8 billion, a 9.1% year-over-year jump. Overall, the NRF forecasts November-December sales growth of 3.7-4.2%, potentially topping $1 trillion. Stocks like Walmart (up 28.36% year-to-date through early December) and Dollar General (surging 66% YTD despite a recent 5.2% dip) reflect broad retail strength, not just “trading down” among cash-strapped consumers. While discount chains are thriving, this signals adaptive spending in an inflationary environment, not outright weakness, evidenced by record in-store and online turnout.
A Cooling But Stable Labor Market
Pessimists highlight unemployment’s rise to 4.4% and slowing job growth as recession red flags. But the Chicago Fed estimates November’s rate held steady at 4.4%, near full employment levels (around 4.2% non-accelerating inflation rate of unemployment, or NAIRU). Year-to-date adds average about 150,000 jobs monthly, with September’s official BLS figure at +119,000. True, private ADP data showed an unexpected -32,000 drop in November, hinting at softness in small businesses. Yet, this is offset by low unemployment claims and no mass layoffs, U.S. job cuts fell 54% in November, per Challenger, Gray & Christmas. Optimists argue this cooling is intentional, engineered by the Fed to tame inflation without crashing the economy. Wage growth is moderating (around 3-4% annually), reducing pressure on prices while supporting household incomes.
Inflation expectations are easing too, with core PCE at 2.6% and consumer surveys like Michigan’s 5-year gauge at 3.0%. This gives the Fed ample room to act: Markets via CME FedWatch price in 85-87% odds of a 25-basis-point rate cut at the December meeting, potentially lowering the fed funds rate from its current 3.75-4% range. Such moves could further broaden market gains, with cyclicals and small caps already rebounding in late 2025 on easing hopes.
Broadening Market Signals Optimism
The stock market isn’t as narrow as detractors suggest. While tech led much of 2025, November saw defensives give way to cyclicals (industrials up 1.2%), and the Russell 2000 small-cap index rose 4% in early December. This diversification aligns with a soft-landing scenario, where lower rates lift “old economy” sectors without popping the tech bubble.
J.P. Morgan encapsulates this view, slashing its U.S. recession probability to 40% by end-2025, citing policy buffers and resilient growth. Their 2026 outlook predicts continued expansion, with stocks supported by corporate earnings and innovation.
Warning: The Perils of Not Sticking the Landing
That said, optimism isn’t blind. Even J.P. Morgan CEO Jamie Dimon has flagged a possible 2026 recession, warning that while current growth is strong (3.8% in recent quarters), external shocks could derail it. Key risks include:
- Policy Missteps: If the Fed cuts too slowly or inflation reignites, higher rates could choke borrowing and investment.
- Trade and Tariffs: Post-2024 election policies, like broad tariffs, might raise costs and slow exports, hitting manufacturing and jobs.
- Geopolitical Tensions: Ongoing global conflicts could spike energy prices, eroding consumer confidence.
- Labor Soft Spots: The ADP dip signals vulnerability; if official November payrolls (due December 16) confirm weakness, unemployment could climb toward 5%, triggering recessionary dynamics like the Sahm Rule.
If these materialize without agile responses, growth could stall below 1%, tipping into contraction. Dimon notes six red flags for employees, including rising layoffs and cooling wages, as harbingers. In short, a soft landing is probable but not guaranteed, policymakers must navigate carefully to avoid a hard one.
What Investors Should Do: Practical Takeaways:
The base case remains a soft landing: growth slows to a sustainable 2–2.5% in 2026, inflation settles near 2%, and the Fed delivers 75–100 bps of cuts, pushing the terminal rate toward 3–3.25%. That environment is historically very bullish for risk assets, especially the “old economy” sectors that have lagged for years.
Actionable positioning right now:
- Rotate, don’t abandon equities. Reduce concentration in the mega-cap tech “lead dogs” that carried 2023–2025. Add to small caps (Russell 2000 still trades at a 20% discount to fair value on forward P/E), equal-weight S&P 500, deep cyclicals (industrials, materials, energy), and financials (banks benefit most from a steeper yield curve).
- Favor international developed markets. A peaking dollar (already down 8% from its September high) and easier global central-bank policy make Europe (STOXX 600) and Japan (TOPIX) attractive for the first time since 2021.
- Own some real assets as insurance. Commodities, gold, and REITs (especially industrial and data-center) hedge against the two big recession triggers: re-accelerating inflation from tariffs or a policy mistake that keeps rates too high.
- Stay long duration if you’re conservative. 10-year Treasury yields near 4.1% offer decent income with little credit risk and big capital gains potential if the Fed indeed cuts aggressively.
- Keep dry powder. A true hard landing would likely come quickly if November/December jobs data disappoints sharply or tariff rhetoric escalates. 10–15% cash or short-term T-bills lets you buy the dip in quality assets at much better levels.
Bottom line: Position for the soft landing that still has ~70% odds, but structure the portfolio so a 2026 recession would hurt far less than it hurts the consensus crowd that’s all-in on the same seven stocks. Diversification is finally rewarding again.
Conclusion: Optimism With Eyes Wide Open
The data tilts toward a resilient U.S. economy in 2026: Strong GDP, buoyant consumers, and a proactive Fed suggest the soft-landing camp has the edge. But as Paulsen’s warnings remind us, ignoring cracks could prove costly. Investors should diversify, into cyclicals, value stocks, and internationals, while monitoring jobs and inflation for signs of trouble. In an uncertain world, betting on growth makes sense, but hedging against recession is prudent.
