US economic outlook April 2025

On-off tariffs fuel a global confidence crisis

• US outlook: Changes in US trade policy are having a profound impact on the global economy and financial markets. The US administration’s on-off tariff policy has led to a confidence crisis with businesses favoring a wait-and-see approach in the face of historically elevated policy uncertainty. US consumer sentiment gauges have plunged to their lowest levels since the 1980s while forward-looking business confidence measures are at multiyear lows. And while this malaise has yet to precipitate a retrenchment in consumer spending and business investment — tariff front-running even lifted March spending — heightened financial market volatility and diminished appetite for dollar-denominated assets pose significant risks to the US economic outlook.
  
  
• Factoring these developments, we have made notable adjustments to our baseline outlook. The US average tariff rate has risen by about 22 percentage points (ppt) to 24% as of April 20. We assume exemptions along with a reduction of tariffs on China will bring the average tariff rate closer to 17% through most of Q2 and Q3. From Q4 onward, we anticipate trade deals will bring the average tariff rate down to 13% — representing a 10ppt increase relative to 2024. We maintain our expectations regarding an extension of most expiring tax cuts paid for by modest spending cuts. We also maintain our lower net immigration estimates at 800,000 per year over the next four years.
  
  
• We have cut our real GDP growth forecast to 1.1% for 2025 and 2026, from 1.7% and 1.6%, respectively, in our prior baseline. Importantly, the anticipated real GDP growth will approach stall speed in Q4 with growth at only 0.2% year over year (y/y). While we see the odds of a recession in the next 12 months around 45%, risks to the outlook are tilted to the downside.
  
  
• Pressures on labor demand and supply: The strong 228,000 payroll gain in March is a reminder that economic fundamentals were robust heading into the tariff storm. Yet, downside risks to the labor market have escalated significantly in recent weeks. The unemployment rate stood at a still historically low 4.2% in March, but it’s poised to rise toward 5% as economic activity slows and business leaders look to manage labor costs amid elevated imported input cost. We foresee job growth decelerating from 160,000 per month in 2024 to around 50,000 in 2025 and believe the decline in net immigration flows will constrain labor supply dynamics.  
  
  
• Worried consumers front-run tariffs: Faced with extreme uncertainty, consumers rushed to buy durable goods in March to avoid price hikes from steep tariff increases. Indeed, the biggest jump in car purchases in over two years and robust spending on building materials, sporting goods and electronics point to some pulling forward of purchases. With the economy set to cool sharply in the coming month, price-sensitive consumers are poised to become more judicious with their spending and reduce non-essential purchases. We foresee real consumer spending growth of 1.7% 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% y/y in Q4 2024 toward 0.3% y/y in Q4 2025.
  
  
• Inflation about to take a turn for the worse: The March Consumer Price Index (CPI) report offered a heartening albeit stale picture of inflation dynamics — before steep increases in tariffs were enacted. Headline inflation slipped to its lowest level since February 2021 — within striking distance of the Fed’s 2% target — while core inflation broke below the 3% mark for the first time since March 2021. Looking ahead though, higher tariffs will lead to a renewed inflation impulse in coming quarters, with core CPI inflation likely to end 2025 in the 3.5% to 4% range.
  
  
• Hawkish caution from the Fed: The Fed remains highly reactive, leaning heavily on incoming data. This high degree of data dependence supports the case for holding rates steady through midyear with Fed Chair Jerome Powell confirming that monetary policy is well positioned to wait for more policy outlook clarity. This cautious stance has served the Fed well amid the recent turbulence in trade policy. Going forward, however, we foresee potential fissures among Fed officials as some favor addressing upside risks to inflation and others support accommodating downside risk to growth. We believe the Fed will eventually decide to ease policy in June with a total of three rate cuts in the second half of the year. Pressure from the administration to ease policy faster will continue to make headlines as the risk of an attempt to dismiss Powell grows — a major risk for stocks, bonds and the US dollar.