US economic outlook: October 2025

Awaiting the data deluge

We have become modestly more constructive on the outlook for economic growth and now expect U.S. real GDP to expand 2.0% in 2025 and 2.3% in 2026 on an annual average basis, a bit stronger than our September update. Our forecast for growth in 2027 remains essentially unchanged at 2.3%.

Our upgraded growth forecast follows stronger readings on consumer spending. Although some U.S. consumer segments are under stress against a backdrop of weaker real income growth, the latest spending data point to aggregate personal consumption expenditures growing at an annualized rate of 3.0% in Q3-2025, an accelerated pace from the first half of the year.

Growth in business investment, in part due to robust AI and other high-tech investment, is another short-run support factor. However, the headwinds from elevated capital costs, trade policy changes and increased uncertainty will likely become more evident as the year rounds to a close.

Emerging strains in the labor market have become more challenging to discern with the federal government shutdown putting the September employment report on hold. Alternative data, such as ADP's payroll report, suggest that employment growth is still soft, a trend we expect to continue in the near term.

Inflation remains above the FOMC's 2% target. The core PCE deflator was up 2.9% year-over-year in August. Services prices continue to moderate, while higher goods prices are exerting an upward force on inflation. Given the impacts of recent trade policy changes have not been fully realized, core inflation of 2.9% year-over-year in Q3 and 3.0% in Q4 seems likely in our view. We then forecast a gradual easing through 2026 and 2027 as trade policy impacts dissipate.

We maintain our view that the FOMC will "look through" a temporary uptick in inflation from tariffs and put more weight on the downside risks to the labor market. As such, we continue to see a 25 basis point cut at both the October and December FOMC meetings, with two additional 25 bps rate reductions in the first half of 2026. This would bring the terminal federal funds rate range to 3.00%-3.25% by the middle of next year.

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