Economic Outlook - August 2025
- U.S. economic growth in the first half of this year has been mediocre – just 1.2% on an annualized rate. Real Gross Domestic Product (GDP) increased at an annual rate of 3% in the second quarter after declining 0.5% in the first quarter. Second quarter growth was primarily driven by fewer imports due to tariff pressures, though consumer spending was solid. (The value of imports is netted against the value of exports when calculating GDP.) The recent GDP report left doubt as to the health of the underlying economy. Consumer confidence has been negatively affected by the potential inflationary impact of tariff policy, while trade policy certainty would promote business confidence and investment. Given recent trends, we expect muted GDP growth in the third quarter.
- U.S. business activity expanded unevenly in July according to the S&P Purchasing Managers Index (PMI). The headline Composite Output Index rose sharply from 52.9 in June to 54.6 in July driven by strengthening demand for services, while the manufacturing sector declined for the first time this year. Business confidence has deteriorated to a two-and-a half year low as tariff uncertainty weighed across sectors, causing private domestic investment to fall 15.6% in the second quarter. Companies may be absorbing at least some of the costs from higher import duties. The Personal Consumption Expenditures Index (PCE), a closely watched inflation measure that excludes more volatile food and energy, rose just 2.5% in the second quarter compared to 3.5% in the first quarter. The index is not far from the Federal Reserve target of 2%, though a lag effect for price increases has kept the Fed in a wait-and-see approach to the data.
- Labor market trends have moderated due, in large part, to a slower pace of job creation. Revised jobs data released by the Bureau of Labor Statistics lowered May and June figures by 258,000. In July, non-farm payroll rose by just 73,000, adding to the worrisome trend of weakening jobs data. The average three-month payroll gain was revised from 150,000 to 35,000. Businesses were more reluctant to add new employees in uncertain times potentially due to chaotic tariff policy. Continuing claims have also risen slightly, indicating a larger population looking for work. The unemployment rate ticked higher to 4.2%. The Federal Open Market Committee (FOMC) is closely monitoring the health of labor markets for alignment with its dual mandate of maintaining maximum employment and price stability. The recent labor market reports suggest a September rate cut is all but certain.
- Home sales activity remains muted as mortgage rates continue to be high and price appreciation challenges affordability. Many buyers are in a wait-and-see mode, while sellers, anchored to peak-pandemic prices, increasingly delist homes rather than negotiate. Existing-home sales fell 2.7% year-over-year according to the National Association of Realtors. Homebuilders are having to offer promotions to move single-family homes as new-home inventory remains high. Sales of new-homes fell 6.6% last month when compared to the prior year, adding to signs of weakness. Affordability needs to improve, yet weak housing starts (below long-term demographic demand) may support further existing-home price appreciation. The wealth effect from rising home prices supports the overall economy, but there is a growing divergence in house price trends across regions.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Labor Department, National Assoc. of Realtors, U.S. Bureau of Economic Analysis, S&P Global Market Intelligence, U.S. Federal Reserve, U.S. Department of Commerce, Moody’s Ratings, Reuters
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