Outlook update: Lowering growth rate as uncertainty casts a long shadow over the economy

Key Points

• Marking down our U.S. growth expectations to 1.9% from 2.5%, reflecting uncertainty.
• Most notably, prolonged uncertainty due to tariffs along with austerity from lower spending and federal layoffs.
• Despite lower U.S. growth, we still don’t see a recession on the horizon for three primary reasons:
  • Hard data has remained solid.
  • Consumers haven’t pulled back in a meaningful way.
  • If data decelerates, we believe the Federal Reserve would pull forward rate cuts, providing much needed stimulus.

 What happened

The ever-changing tariff landscape appears to be taking a toll on consumers and businesses alike as evidenced by multiple months of sentiment surveys, including the University of Michigan (slide 9) and Conference Board consumer sentiment surveys, the NFIB survey of small businesses, and the Business Roundtable CEO survey (slide 10). But these are soft data, which are telling a very different story than hard data, such as figures for jobs, retail sales, factory orders, production, and other measures of output – those remain strong.

Understand that we aren’t taking sides as to the validity of tariffs. On the contrary, we’re taking the White House, which has shown a penchant for increasing tariffs, at its word that it will. However, the “on again/off again” implementation has rightly stirred uncertainty and inflationary fears.

This uncertainty casts a long shadow over the economy, clouding decision making for businesses. Indeed, based on our conversations, businesses desperately want these trade issues to be resolved quickly. To wit, the most frequent sentiment has been, “even if tariffs are increasing – just tell us, but don’t hopscotch from one day to the next,” which would allow them to adjust and move forward.

Accordingly, many businesses are taking a ‘wait & see’ approach, which seems prudent but isn’t pro-growth either for the economy or for business profits. At the very least, it causes some businesses to delay actions that they would have taken, while others may eventually choose to cancel plans all together due to the uncertainty. Some consumers appear to be doing the same. Furthermore, the longer this uncertainty persists, it intensifies the drag on the economy.

Alas, we are seeing tangible signs of this uncertainty impacting economic activity. As such, we are reducing our 2025 forecast for gross domestic product (GDP) to 1.9% from 2.5% (slide 3) and bumping our year-end unemployment up to 4.4%.

Our take

Yet, current conditions remain solid, which was the cornerstone of our “no recession” call. Most notably, consumers haven’t pulled back in a meaningful way. On slide 4, we show several key consumer metrics. Also, on slide 5, we show an indexed view of real incomes, real consumer spending, employment, and manufacturing production, which illustrates the strength of this recovery since the COVID recession. Similarly, on slide 7, we show that businesses also remain in good shape.

Additionally, there are timing issues. For instance, the new administration has chosen to front-load negatives such as tariffs but there should be positive offsets as the year progresses, including deregulation and other business investment incentives, along with more stability and clarity on trade policy. Another possible boost to growth would be a permanent solution for the Ukraine-Russia conflict, which has aggravated inflationary pressures globally.

What about the Federal Reserve?

We believe that if economic data decelerates, the Federal Reserve (Fed) would reduce interest rates sooner than is widely expected, which help boost economic growth. If consumer demand weakens, it’s certainly possible that some of the potential inflation pressures from tariffs wouldn’t materialize. Moreover, with the Fed’s target rate at 4.25% to 4.50%, there’s ample room to cut rates if needed.

We also anticipate that the Fed will eventually stop reducing the money supply and shrinking its balance sheet, a process known as quantitative tightening (QT). We think that will occur at some point this summer, which could also contribute to lowering interest rates.

What would change our view?

The consumer is the key in our view, especially in hiring trends. More people with jobs, which come with additional income, provides the support for continued spending.

Our preferred indicator is weekly jobless claims since economic weakness tends to materialize there first. If we see a sustained substantial increase in weekly jobless claims, then we’ll shift our recession stance. But, at present, weekly jobless claims are hovering near the pre-pandemic average.

Conversely, there are several scenarios that could exacerbate the situation. Top on the list would be a further escalation of the trade war, replete with dramatically increased tariffs pushing prices and inflation significantly higher. Over and above that would be a sharp pullback in consumer spending.

Additionally, larger job cuts and fiscal austerity due to the Department of Government Efficiency (DOGE). We are currently penciling in cuts of 200,000 federal jobs.

Bottom line

The U.S. economy remains resilient, and we believe solid growth will endure; however, it’s in a holding pattern awaiting resolution on the tariffs. Additionally, uncertainty regarding the impacts of policy shifts by the new presidential administration and Congress remain a further headwind for the economy in the near term. That has contributed to the recent bouts of volatility in financial markets, which we expect will continue for the foreseeable future. Ultimately, we believe that the U.S. economy should be able to power through the uncertainty, but it will take several months to reach the other side. To be sure, we expect a bumpy path forward.