Kudlow's 5% Growth Thesis: Assessing the Evidence and Policy Engine

The core of Larry Kudlow's "paying off" thesis rests on a simple, powerful narrative: the Trump economic program is generating a favorable real wage environment. The evidence he cites points to a specific dynamic-nominal wage growth outpacing inflation. The data shows wages for middle-class working folks are up about 5% year-on-year, a pace that, if sustained, would indeed represent a significant improvement in purchasing power. This is the headline metric that signals success.

Yet, the sustainability of this story hinges on the durability of its two policy-driven engines. The first is a powerful headwind on prices, specifically energy costs. The evidence for this is robust and forward-looking. Both the U.S. Energy Information Administration and Goldman Sachs project a global oil surplus in 2026, with Goldman Sachs maintaining its 2026 average price forecast of $56 per barrel for Brent crude. This forecast implies a 19% decline from 2025 and is driven by supply outstripping demand. The implication is clear: a sustained drop in oil prices acts as a broad-based disinflationary force, pushing down costs for transportation, manufacturing, and ultimately, a vast array of consumer goods. This directly supports the claim that inflation is being "pushed down."

The second engine is the economy's own strong growth momentum. The data here is also compelling, showing a clear acceleration. The U.S. economy grew at an annual rate of 4.3% in the third quarter of 2025, building on a 3.8% gain in the second quarter. This robust headline growth provides the underlying economic strength that can support higher wages without triggering a wage-price spiral. It suggests the expansion is broad-based and not reliant on a single sector.

The bottom line is that the evidence presents a coherent, if fragile, picture. A projected oil surplus is creating a structural disinflationary tailwind, while strong GDP growth is fueling wage gains. The 5% wage increase, if it continues to outpace the current inflation rate, would indeed create a favorable real wage story. However, the setup is entirely dependent on the durability of these policy drivers. The oil price forecast is a projection, not a guarantee, and the strength of the growth engine must be maintained to keep wage pressures in check. For now, the numbers align with the thesis. The test will be whether this favorable gap between wage growth and inflation widens or narrows as the year unfolds.

The Policy Engine: How "Drill, Baby, Drill" and Tax Cuts Drive Growth

The growth story is being actively manufactured through a deliberate policy mix. At its core is a strategy of fiscal retrenchment, a direct reduction in the size of government to shrink its contribution to GDP. The evidence shows this is already underway, with federal jobs falling by roughly 270,000 this year while private employment expands. This deliberate drawdown of government outlays is a clear lever to reduce the spending component of the economy. Yet, it carries a tangible risk: it introduces a headwind to overall GDP growth, a trade-off for lower deficits and reduced government influence.

Simultaneously, the administration is aggressively pursuing a revenue-generating tariff policy. Officials have promised to give back refunds out of the tariffs to Americans, framing it as a return of collected funds. The scale of this revenue stream is significant, but its net effect on the economy remains highly uncertain. The policy could alter trade balances, but it also introduces a direct inflationary pressure on consumer prices for imported goods. The promised refunds may offset this, but the timing and mechanics are unclear, leaving the overall fiscal and trade impact in a state of flux.

On the investment front, a powerful tailwind is emerging from the private sector: a boom in artificial intelligence. Business investment in information processing equipment is surging, driven by strong outlays on AI technologies. This is a critical source of capital expenditure, contributing to growth and productivity. However, the broader investment landscape is bifurcated. While AI spending is hot, overall business investment growth has moderated from earlier highs, indicating the boom is concentrated in a few advanced sectors. The balance of risks here leans to the downside, as the economy's growth is becoming increasingly reliant on a narrow set of high-tech investments that are vulnerable to shifts in sentiment or profitability.

The bottom line is a policy engine with multiple, sometimes conflicting, gears. Fiscal retrenchment reduces government's role, tariffs aim to generate revenue and reshape trade, and AI investment offers a path to productivity gains. For the 5% wage growth story to hold, this mix must sustain robust private sector expansion while the oil-driven disinflationary tailwind takes hold. The risks-slowing private investment, uncertain tariff outcomes, and the drag from shrinking government-are real and could quickly alter the trajectory. The policy engine is running, but its ultimate destination depends on how smoothly these disparate forces align.

The Path to 5%: Scenarios, Catalysts, and Downside Risks

The administration's ambition of 5% GDP growth for 2026 is a bold target, one that would represent a historic return to the expansionary pace of the late 1980s. The feasibility of this goal hinges on a delicate balancing act. The evidence shows the economy is already demonstrating strength, with real GDP jumping by an annualized 4.3% in Q3 2025. Yet, that momentum is built on a narrow foundation. The path to 5% next year is plausible only if the powerful engines of AI-driven investment and affluent consumer spending can fully offset a broader moderation in growth. The data suggests this is a precarious bet, as the economy's growth is becoming increasingly bifurcated.

A key catalyst for validating the thesis is the resolution of trade disputes and the promised flow of tariff refunds. Officials have stated that President Trump said next year he's going to give back refunds out of the tariffs, a move that could directly boost consumer purchasing power. If these refunds materialize as promised, they would act as a fiscal stimulus, particularly for middle- and lower-income households who are most sensitive to price changes. This would help sustain the consumption engine, which contributed 2.4 percentage points to Q3 growth. The potential for such a policy to act as a growth catalyst is real, but its timing and mechanics remain uncertain, introducing a significant variable into the 2026 forecast.

The primary downside risk, however, is a sharp slowdown in consumer spending as higher prices and borrowing costs pressure lower-income households. The evidence already points to this vulnerability. While final sales to domestic purchasers rose 2.9% in Q3, the outlook for 2026 anticipates slower US growth and higher inflation, with consumer spending becoming increasingly uneven. High-income households are expected to continue driving outlays, but lower-income families face headwinds from higher prices, slower wage and job growth, and elevated borrowing costs. This divergence threatens the breadth of the growth engine. If spending by the broader population falters, the economy's reliance on a few narrow pillars-AI investment and affluent consumers-becomes a liability, not a strength.

The bottom line is a high-stakes scenario. The policy engine is designed to deliver a 5% economy, but its success depends on a series of favorable outcomes: sustained AI investment, the successful implementation of tariff refunds, and the maintenance of robust consumer spending. The evidence shows the ingredients are present, but they are not yet fully aligned. The risks are concentrated in the consumer sector, where the benefits of the economic program may not be widely felt. For the 5% target to be more than a hopeful projection, the administration must ensure its policies translate into tangible, broad-based relief for American households.