Economic Outlook - September 2025
- The Federal Reserve’s preferred inflation gauge, the core Personal Consumption Expenditures Index (PCE), has remained above the Federal Reserve’s 2% target for over 50 consecutive months. This is the longest sustained period of elevated inflation by this measure since data collection began in 1997. The most recent July reading was 2.6%. The Federal Reserve’s inflation target of around 2% has served as a cornerstone of U.S. monetary policy for decades.
- U.S. job growth continued to slow in August with just 22,000 new jobs, a sign that the labor market is deteriorating. The U.S. Bureau of Labor Statistics data indicates a summer of slow hiring and points to a stagnating job market. The Bureau’s report also highlighted weakness from earlier in the year. The government has since revised its numbers from previous months and stated that the economy lost a net 13,000 jobs in June. It was the first such decline since December 2020.
- Persistent inflation and stagnant job growth squeeze the Federal Reserve between its twin duties to maintain a stable currency and contribute to full employment using monetary policy. Current consensus expectations are shifting to a federal funds interest rate cut this month. We believe the rate cut will be in the 25 to 50 bps range (0.25% – 0.5%).
- Encouragingly, nonfarm business labor productivity increased 3.3% in the second quarter of 2025, the U.S. Bureau of Labor Statistics reported. Output increased 4.4%, and hours worked increased 1.1%. From the same quarter a year ago, productivity increased 1.5%, indicating a year-over-year growth trend. Current growth outpaces the 1.5% annual average since 2004.
- Productivity growth is a primary driver of long-term economic growth and improvements in living standards. As productivity increases, our economy can produce more goods and services with the same resources. This increases incomes and access to goods and services, stimulating more demand. Growth in output per hour of labor can be achieved through factors such as the quality of workers and technological progress. Corporate profit margins grow, and economic growth exceeds the rate of inflation. Remarkably, the U.S. economy has delivered a relatively steady increase in living standards for more than 150 years. However, this constant change contains friction. Productivity growth is usually associated with both job destruction and job creation.
- The current chapter of technology innovation is artificial intelligence (AI). AI is essentially more effective software (smart agents) that drives efficiency with potential improvements in every sector of the economy. Major investments are underway. We are in the early stages of experimentation and adoption. As we monitor results, initial studies suggest that call center customer support agents, software developers, and mid-level professionals are more productive using AI tools. As AI becomes more pervasive, we expect more studies and more measures of the impact of AI on productivity.
Sources: FactSet, Yardeni Research, U.S. Bureau of Economic Analysis, The Federal Reserve, U.S. Bureau of Labor Statistics, The Wall Street Journal
Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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