UA economist Mervin Jebaraj lays out expectations for 2026

The annual economic forecast conducted by the University of Arkansas’ Center for Business and Economic Research offers a big picture view of state, national and international commerce. The leader of the center, Mervin Jebaraj, is the lead economist at the UA Walton College of Business.

This year, the forecast conference pulled in additional commentary and observations from Alberto Musalem, president and chief executive officer of the Federal Reserve Bank of St. Louis. 

Jebaraj and Talk Business & Politics Editor-in-Chief Roby Brock sat down for a conversation after the forecast luncheon for a deeper dive.

Roby Brock: Let’s begin with the fact that inflation has been a dominant issue for the last couple of years. It’s certainly at the root of a lot of conversations about the Federal Reserve and President Trump and the whole economy overall. My question to you is a really simple one: is inflation under control?

Mervin Jebaraj: If only the answer was so simple as your question. In short, the answer is no. We have a stated inflation target and that target is 2% and has been going on five years now. And we’ve been running above 2% inflation consistently. So in short, the answer is no. 

We haven’t reached our inflation target and therefore inflation is not under control. It seemed like at the end of 2024, we were on a glide path towards 2% inflation. With all the changes in policy that happened in the last year in 2025, inflation has stubbornly remained around 3%. The most recent reading at the end of 2025 was 2.8%, but that included some big caveats. One of which was that in October when the government was shut down, we did not collect any inflation data to measure inflation. As a result, most of the data going into the inflation measure basically measured inflation between September and October as being zero, which we all know some prices went up, some prices went down — it certainly wasn’t zero across the board and that has some sort of base effect on inflation. 

So inflation of 2.8% is necessarily a little bit higher than if we had actually collected October’s data. That won’t work itself out until April or May of this year [when data revisions are made]. So up until we get that data, we’re going to have the effect of that 0% inflation in October. I think inflation is probably still close to 3%, which is stubbornly high.

Brock: In the forecast, there were predictions that GDP is expected to either hold steady or improve. We’ve seen some decent, solid GDP growth nationally. Also, there are predictions of job growth slowing down and layoffs rising. We have seen that statistically over the last few months. That seems to be a contradiction to me. The economy appears to be healthy and predictions are that it will be healthy with economic output and economic activity, yet we will see slow job growth and layoffs. Tell me why the equation is what the equation is.

Jebaraj: So much of the economic growth in the headline GDP figures is sort of one-offs or things that we don’t expect to sustain a lot of job growth. A lot of the big numbers in GDP that you saw in the second and third quarter — and the negative number that you saw from GDP in the first quarter — largely had to do with distortions to how the trade picture works into our GDP. In the first quarter, you saw heavy imports trying to get ahead of the tariffs, and then in the second and third quarters you saw a lot more exports and a lot fewer imports. That wasn’t necessarily because we were exporting more, it’s just that we weren’t importing as much because we had stockpiled all our imports in the first quarter. Add along with that, a lot of movements of gold with gold prices being really high in the last year and those necessarily increased our exports as well. So you see a lot of increase to GDP from factors like that that don’t necessarily speak to economic growth. 

The one piece that was economic growth that added to GDP was all the investment in artificial intelligence … The growth in data center and construction associated with data centers across the country and all the investment that goes into the production of chips, the installation of all of those components, that piece of GDP is real growth. We’re expected to see continued GDP growth from investments in artificial intelligence, which if you’ve looked at the earnings reports of some of the big tech companies in the last month, you’ll see that they still plan to continue increasing their investments in data centers and artificial intelligence, even though the market hasn’t necessarily reacted positively to those pronouncements of large investments in AI data centers. We expect that to continue to add to growth, and some of the distortions from trade will work itself out now that we’ve reached some form of stability in where we are on tariffs at least until Supreme Court rules otherwise.

The other side of that is the jobs picture, which with the immigration levels as low as they are,  we need fewer jobs just to be able to sustain the growth in population because we don’t have that growth in population anymore. In the last year, I think with all the policy uncertainty, the one thing that could describe the job market was there were not many layoffs and not many hires either. It was a ‘no layoff, no hiring’ economy. There were a very low number of jobs created in the last year and that affected certain populations like new graduates, for example, and that uncertainty we expect to carry through to this year. We expect lower job growth this year as well. There is still the risk of higher levels of layoffs in this year; a lot of decision making got postponed in the last year. If the rest of the economy outside of the artificial intelligence boom does not grow significantly, we would expect to see more layoffs this year and far fewer hires than even last year.

Brock: Let’s talk about a factor that could change that equation a little bit. The One Big Beautiful bill that Republicans and President Trump championed last year, it delayed its effect until this year for say, agriculture and farming. Also, there are a lot of tax breaks built into 2026 versus 2025. How do you see that impacting the economy in 2026?

Jebaraj: We expect that bill to modestly improve growth in 2026, particularly in the first half of the year. A lot of the tax bill changes will show up in employees’ withholding this year, and then will also show up in the refunds that they get from the IRS whenever they file their taxes. Both of those are sort of a one-time hit. We’d expect those impacts to be in the first half of this year and then wane through the rest of the year. Again, a modest impact from a rather expensive bill, but we expect only modest impacts from the consumer side of the economy. 

It does have some investment changes for businesses as well. Businesses don’t just respond to tax incentives; they also respond to what they think the overall economy is going to do. So nobody’s going to invest if they don’t think the economy is going to be growing, whether or not there are tax incentives to do so.