Economic Update Spring 2025

The U.S. economy remains in an expansion phase, with real gross domestic product (GDP) increasing at an annual rate of 2.4% in the fourth quarter of 2024, according to the U.S. Bureau of Economic Analysis. As of March, the Federal Reserve projects a median real GDP growth rate of 1.7% for 2025, reflecting anticipated economic conditions under appropriate monetary policy and assuming no major shocks to the economy. Wall Street economists, however, are revising their growth forecasts, even without a worst-case tariff scenario. For Q1 2025, projections suggest U.S. economic growth of 1–2%. The Atlanta Fed’s GDP Now model, a somewhat volatile indicator, shows the US economy contracting in Q1.

Globally, many major economies are showing signs of late-cycle expansion, characterized by stable services activity and employment but softening manufacturing. The U.S. is trending toward late-cycle dynamics, with recession risks rising if tariffs escalate further. The ISM Manufacturing survey is hovering near the expansion-recession threshold, while ISM Services data indicates the U.S. economy remains in expansion territory.

Shifting trade policies are already impacting business and consumer confidence, posing potential risks to the U.S. economy and markets. While the current level of tariffs has been reduced and exemptions made for critical goods, higher tariffs could dampen economic activity and raise import prices. Despite these challenges, the U.S. is better positioned than many other countries due to its size, economic resilience, and financially healthy consumers. While the economy is not yet rolling into a recession, a slight slowdown remains a possibility. Treasury Secretary Scott Bessent has cautioned that there are “no guarantees” the U.S. will avoid a recession, with risks remaining elevated.

Credit spreads, which had been signaling recession concerns, have recently narrowed to levels not historically associated with a recession. This shift provides some reassurance, though vigilance is warranted.

The Federal Reserve's dot plot projections for 2025, released in March, indicate a median federal funds rate of 3.9% by year-end. This reflects expectations for a gradual decline in rates as inflation pressures ease and economic growth stabilizes. Projections range from 3.6% to 4.4%, equivalent to a target range of 3.75% to 4%. The current key borrowing rate remains between 4.25% and 4.5%, which is considered restrictive. Housing sector data has been negative for some time, largely due to elevated mortgage rates. Lower borrowing rates could stimulate economic growth and boost consumption.

Inflation trends are moderating. In March, the Bureau of Labor Statistics reported a 12-month consumer price index (CPI) inflation rate of 2.4%, while core inflation (excluding food and energy) ran at 2.8%, the lowest since March 2021. The Personal Consumption Expenditures (PCE) price index rose 2.8% year-over-year, with core PCE also increasing by 2.8%. However, the Atlanta Fed's Sticky-Price CPI remained elevated at 3.3% year-over-year, reflecting slower-moving price changes. Tariffs are expected to exert upward pressure on inflation, though the overall trend remains steady for now.

Tariffs can influence inflation in complex ways. A one-time tariff may cause modest price increases that stabilize over time, while a prolonged trade war could lead to higher long-term inflation and rising interest rates. Economists estimate that 30–50% of tariff costs are passed on to consumers, with higher rates for products with fewer substitutes. Historical data from the Bureau of Labor Statistics shows that tariffs during 2018–2019 were largely absorbed by U.S. consumers, though their impact on inflation was muted. This time, the global nature of the trade war could lead to different outcomes.

Long-term inflation is primarily a monetary policy issue. Excessive money supply chasing limited goods, as seen during recent supply shocks, drives inflation. Tariffs may temporarily depress economic growth as businesses and consumers adjust to price shocks, but substitute goods and spending patterns typically emerge over time.

The overall employment picture says the US economy is in an economic expansion. The unemployment rate rose to 4.1% in February from 4% in January, according to the Labor Department. Layoffs in government jobs contributed to this increase, with federal employment experiencing its largest decline since 2022. Federal non-postal job losses are expected to accelerate in the coming months. The four-week moving average of jobless claims reached its highest level since October, while Challenger data showed job cuts more than doubling year-over-year for the first time since August 2023. Government employees do not drive the U.S. economy, but government spending has a significant impact on GDP. Reduced federal spending must be offset by consumer and business spending to sustain economic growth and meet Wall Street earnings forecasts.

The White House is cutting government jobs and programs to narrow the budget deficit, including reductions in defense spending. Since the COVID-19 outbreak, the U.S. government has financed economic growth through debt issuance, resulting in a public debt of $37 trillion. This debt has contributed to elevated inflation levels. Excessive government spending, funded by debt, has strained the economy and markets. Interest payments on government debt now consume more than one-third of the federal budget, surpassing defense spending. This burden impacts consumer rates, such as mortgage rates, and contributes to higher inflation.