US economic outlook November 2025

Signal lost? Decoding a K-shaped, tariff-tinged expansion

• K-shaped economy: The 43-day government shutdown — the longest on record — will leave a modest but permanent dent in real GDP (0.1%–0.2%). Yet its most significant effects are intangible. The lack of timely statistics on the economy has amplified uncertainty already stoked by a patchwork of mixed indicators and policy volatility. On the margin, labor demand continued to soften into November, though layoffs remained subdued. Inflation appears to have firmed, but the pass-through from tariffs is unfolding gradually and unevenly. At the same time, a growing cohort of consumers are increasingly hesitant to spend ahead of the holidays. Business investment remains concentrated in artificial intelligence (AI)-linked segments, while broader capex reflects a more cautious tone. The recent surge in stock market valuations — particularly among AI-adjacent firms — has also prompted renewed concerns about a potential asset bubble, contributing to investment hesitancy in other sectors. We expect US GDP to grow by around 2.0% in 2025, moderating slightly to 1.9% in 2026 — constrained by tariffs and tighter immigration, but supported by ongoing AI investment, a modest fiscal impulse in early 2026 and some deregulatory momentum.
  
  
• Slower labor demand: At first glance, the long-delayed September payrolls report appeared reassuring. But beneath the surface, job growth remained fragile and narrowly concentrated as the economy approached the shutdown. The US added 119,000 jobs — above expectations — but the unemployment rate edged up to 4.4%, its highest level since late 2021. Looking ahead, tighter immigration will limit labor supply, reducing the breakeven pace of job growth to just 0 to 50,000 per month. Businesses are expected to pare back hiring and undertake targeted layoffs to manage rising input costs, especially those linked to tariffs.
  
  
• Polarized consumers: Consumer spending remains resilient, but the divergence is stark. High-income households, buoyed by strong income and wealth gains, continue to spend freely. Meanwhile, lower-income households face intensifying pressure from elevated prices and interest rates. We expect consumption growth to ease modestly in 2026 amid slower job creation and stickier inflation.
  
  
• All about AI investment: Investment dynamics reflect the broader K-shaped pattern. AI-led capital expenditures in software, R&D and information processing equipment drove one-third of GDP growth in H1 2025. In contrast, non-tech investment has stagnated — held back by elevated tariff-related costs, heightened uncertainty and high financing costs.
  
  
• Tariff-induced inflation filtering through: Headline Consumer Price Index (CPI) rose to 3.0% year over year (y/y) in September, with core CPI steady at 3.0% y/y. Tariffs are putting upward pressure on prices, though the inflation process remains relatively orderly — partially mitigated by easing shelter costs. The pass-through from tariffs remains uneven across categories — apparel, groceries, autos, furniture, electronics and alcohol. Many firms have absorbed cost shocks through inventory, margins and supply chain shifts, but these buffers are thinning. We estimate the cumulative inflation boost from tariffs is around 0.6 percentage point (ppt) to 0.7ppt and will eventually reach 1.0ppt, with CPI inflation peaking near 3.2% in early 2026.
  
  
• Fed on hold till 2026: The Federal Reserve cut the federal funds rate by 25 basis points (bps) to 3.75%–4.00% in October, with Chair Jerome Powell emphasizing policy optionality. A two-sided Federal Open Market Committee (FOMC) dissent underscored growing divergence between those calling for more easing and those wary of tariff-driven inflation or unconvinced of the labor market softening. Following two consecutive rate cuts, we expect the Fed to pause in December — especially given that the combined October–November jobs report will be released after the meeting. We forecast a rate cut in January 2026 and 50bps of total easing over the year. We also expect the Fed to end quantitative tightening (QT) and begin modest balance sheet expansion in the coming weeks.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.