Data since our previous monthly update suggest consumers are still spending, businesses are still hiring and activity is still expanding. Yet, uncertainty continues to weigh on the outlook. We’ve boosted our domestic growth forecasts in this update on the back of upward revisions to prior data and a U-turn in imports, but it's still early days yet in terms of the potential tariff-induced slowdown.
Upward growth adjustments primarily stem from revisions to household income and a weaker trajectory for import growth. The stronger near-term trend in income will provide some more cushion for consumption, while the sharp reversal in April imports will boost GDP growth in Q2 and suggests a weaker path of imports over the course of the year.
Even after accounting for our upward adjustments, we still project growth will end the year at the slowest annual pace outside a recession going back to at least the early 1990s. The temporary lowering of China tariffs would be reassuring had that not come amid continued trade threats, not to mention court challenges which serve to muddy rather than clarify future trade policy.
The headline metrics are fraught with trade distortions. Real final sales to private domestic purchasers offers a better read today than GDP does. This measure looks past growth in inventory, net exports and government spending to assess underlying domestic demand (i.e., consumer spending and business fixed investment). By this measure, we project that domestic demand will contract in the second half of the year, even after accounting for our upward revisions.
Price data are only beginning to reflect tariff-related costs and the degree of persistent price growth remains an open question. Hiring also remains stable, suggesting the timing and degree of Fed easing may be pushed out and scaled back. We could still see the Fed cutting rates in September if the labor market stumbles in the next month or so, but we have scaled back the degree of cumulative easing this year to 75 bps, down from 100 bps previously.
While U.S. economic growth held up reasonably well in the first half of the year, increased uncertainty about where tariffs and fiscal policy are headed from here is leading to hesitation among businesses and consumers. We still expect growth to moderate under the weight of this unpredictability.
