US economic outlook: June 2025

Second-half slowdown despite improved fundamentals

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.

Second-half slowdown despite improved fundamentals

There were two notable trade developments in May. First, the U.S. and China agreed to postpone higher reciprocal tariffs. This brought the current reciprocal rate on China down to 10% from 125% previously, and given the height of that rate and size of U.S. trade with China, the estimated total U.S. average effective tariff rate fell to 14% from 25% previously (Figure 1). (The 20% tariff levied on China due to fentanyl was left unchanged.) The second development came later in the month when the Court of International Trade called into question the president’s authority in using the International Emergency Economic Powers Act of 1977 to implement recent tariffs. Duties imposed under this act, including those on Canada, Mexico and reciprocal tariffs across countries, could be repealed if the ruling is upheld, but they will remain in effect until an appeals court reaches a final decision.

Tariff revenue has begun to trickle in, and with implementation delays and shifting imports, the effective tariff rate was just under 6% in April. While below estimates, as seen in Figure 2, this marks the highest rate faced by U.S. importers in over 50 years. So far, tariffs have mostly manifested in uncertainty and an initial spurt of activity as businesses pulled forward orders to stock inventory ahead of new levies. But the broader early growth-hampering warning signs are now emerging.

Download the full report