US economic outlook March 2025

From boom to gloom: assessing the economy’s foundations 

• US outlook: Not long ago, US exceptionalism dominated the narrative; now the mood has turned sharply pessimistic. What changed? The shift stems largely from worsening soft data, with private sector surveys turning negative in recent weeks due to broad-based policy uncertainty and tariff implementation. Consumer sentiment has plunged, small-business uncertainty is near record highs, purchasing managers are increasingly downbeat and consumer inflation expectations are surging. At face value, these signals suggest a sharp pullback in economic activity. However, the US economy has been bolstered by exceptionally strong fundamentals over the past two years: robust income growth, healthy private sector balance sheets, fiscal tailwinds and strong productivity gains.
  
  
• That said, five key factors will contribute to slower economic activity in the coming months, none of them new, as we’ve been flagging these risks for some time. These include slower disposable income growth, fading fiscal tailwinds, rising tariffs, higher interest rates, and surging policy uncertainty and market volatility. There’s a non-negligible chance of negative real GDP growth in Q1, as businesses front-loaded imports ahead of tariff hikes, leading to a surge in January imports — particularly in gold. Since imports subtract from GDP calculations and consumer spending growth was soft in Q1, there is a non-negligible chance of GDP contraction. The Atlanta Fed’s GDP tracker is at minus 1.8%, while our estimate stands at 0.5%.
  
  
• As a result, we have revised our GDP growth outlook down to 1.7% in 2025 and 1.6% in 2026. While we don’t anticipate an outright pullback in economic activity, we see the likelihood of a recession in the next 12-months at about 40%. 
  
  
• Cooler labor demand and supply dynamics: The healthy 151,000 payroll gain in February provided reassurance that the economy’s foundation is still solid. Yet significant job growth concentration, soft hours worked, a rise in the unemployment rate and lower labor force participation indicate a continued cooling in labor market conditions. Business executives continue to rein in hiring but are still holding off on broad-based layoffs as they navigate a more uncertain economic and policy environment. Job growth is expected to decelerate from 160,000 per month in 2024 to around 80,000 per month this year, with the unemployment rate rising above 4.5%. 
  
  
• Consumer resilience will be tested: The modest rebound in retail sales in February following a downwardly revised plunge in January indicates increased spending reluctance on the part of the consumers as flagging consumer sentiment, rising job insecurity and another bout of cold winter weather took a toll on households’ willingness to spend. Notably, pre-emptive inflation anxiety (PIA) appears to be weighing on consumer morale, with sentiment gauges plunging and inflation expectations rising. Looking ahead, we foresee real consumer spending growth of 2.2% in 2025, following a 2.8% advance in 2024. The average will mask a more pronounced moderation in spending trends, with consumption momentum likely to ease from 3.1% year over year (y/y) in Q4 2024 toward 1.5% y/y in Q4 2025.
  
  
• Bumpy disinflation with upside risks: Headline CPI inflation fell 0.2 percentage points (ppts) to 2.8% y/y in February — marking the first deceleration in five months — and core CPI inflation cooling 0.2ppts to 3.1% y/y — the slowest pace since April 2021. This confirmed that, despite the idiosyncratic price bumpiness, the economic fundamentals have been and remain disinflationary. Looking ahead, however, tariffs, confusion around trade policy, and tighter immigration policy mean the risks to inflation are titled to the upside. We foresee headline CPI inflation picking up modestly in H2 and averaging 2.8% y/y in Q4 2025 and 2.4% y/y in Q4 2026. 
  
  
• A wait-and-see Fed amid rising stagflation risk: The Federal Reserve held the federal funds rate unchanged at 4.25% to 4.50% at the March Federal Open Market Committee (FOMC) meeting. The unanimous vote in favor of the policy rate hold reinforced the Fed’s wait-and-see approach, with officials signaling little urgency to adjust policy amid elevated uncertainty around the economic outlook. We continue to anticipate two 25 basis point (bps) rate cuts in 2025, in June and December. But we shouldn’t get lulled into a false sense of Fed policy stability. A reactionary monetary policy stance means policy direction could rapidly turn more dovish on weaker economic and labor market data, just like it could turn hawkish with hotter inflation and inflation expectations readings.