Economic Outlook - July 2025
- The Federal Open Market Committee (FOMC) left its federal funds target interest rate unchanged at 4.25% – 4.50% when it met in June. The FOMC statement acknowledged that “although swings in net exports have affected the data [likely due to tariff policy adjustments], recent indicators suggest that economic activity has continued to expand at a solid pace.” In addressing its dual mandate, the statement continued, “The unemployment rate remains low, and the labor market conditions remain solid. Inflation remains somewhat elevated.” Some analysts suggest that the FOMC relies too much on backward-looking data while missing indications of economic weakness. However, to date, the hard data has supported the Federal Reserve’s wait-and-see approach.
- Nonfarm payrolls increased a seasonally adjusted 147,000 in June, according to the Bureau of Labor Statistics (BLS), exceeding economists’ consensus expectations. The BLS also revised the payroll increases higher in both April (up 11,000 to 158,000) and May (up 5,000 to 144,000). The unemployment rate fell to 4.1%, the lowest level since February, despite expectations for an increase to 4.3%. The BLS report also stated that most of the job gains occurred in state government and healthcare. The better-than-expected employment report reduces the likelihood of a cut in interest rates by the Federal Reserve Board at its upcoming July meeting.
- The U.S. Bureau of Economic Analysis (BEA) revised down its first quarter estimate of real gross domestic product (GDP) growth to -0.5% (from -0.2%) due to an increase in imports and a decrease in government spending. GDP growth is expected to rebound in the second quarter due in part to a reversal lower in net exports. According to the Atlanta Fed GDPNow model, real GDP in the second quarter should increase by 2.6% versus the blue chip consensus forecast of 2%. Estimates of 0.9% annualized first-half real GDP growth suggest an economy growing above stall speed but below the Fed’s expected trend growth rate of 1.7%. We expect mean reverting growth in the second half of the year.
- Personal consumption expenditure (PCE) inflation rose 0.13% (1.63% annualized) in May, but the year-over-year PCE inflation rate accelerated to 2.34% (from 2.19%) due to base effects. The Core PCE (the Federal Reserve’s preferred inflation gage) rose 1.78% annualized, lifting the year-over-year rate from 2.57% to 2.67%. The increase in May’s year-over-year PCE inflation rate due to base effects (the impact of the prior year’s monthly data being dropped) adds to the debate over Federal Reserve rate policy. On a backward-looking basis, inflation is still well above the Federal Reserve’s 2.0% target; however, on a forward-looking basis (annualizing the most recent monthly data), inflation is already below the 2% target. A Federal Reserve focusing on the latter would suggest that rate cuts are likely before year-end, perhaps as early as September.
- The Institute for Supply Management (ISM) reported that the U.S. ISM Manufacturing PMI rose to 49 in June, remaining below 50 for the fourth month in a row. A reading below 50 indicates contraction. The ISM PMI is a survey that focuses on larger multinational companies. The ISM also reported that the overall economy continued to expand for the 62nd month in a row. June ISM Services PMI was 50.8. We anticipate continued volatility around the manufacturing data until there is more clarity on tariff policy.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, National Association of Realtors, U.S. Bureau of Economic Analysis, Institute for Supply Management, U.S. Federal Reserve, Congressional Budget Office, Moody’s Ratings, Reuters, Associated Press
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