Our economic outlook for the United States

Recent trade developments have helped reduce some uncertainty for the U.S. economy, leading us to raise our baseline assumption for the effective tariff rate modestly higher to a range near 17% by year-end. However, the economic impact of offsetting factors such as foreign investment agreements and the delayed pass-through of elevated tariff rates to consumers will need to be evaluated as more information emerges. For now, we see the economy tracking in line with our expectations of a softening labor market, GDP growth of around 1.5%, and core inflation of around 3% by year-end.

The coming months will be pivotal in assessing how well the economy is able to absorb tariff-related pressures, which will then play a leading role in determining monetary policy. For the first time in this cycle, revisions to the July labor market report showed an economy that added fewer jobs than what we estimate to be the replacement rate (around 75K), a sign that the economy is oscillating around a neutral growth rate.

Prior to the labor market report, we viewed communication from the July Federal Reserve meeting to be mildly hawkish toward a September rate cut, a stance we expect will now shift toward a renewed focus on the employment side of the Fed’s dual mandate. We see the Fed as on track for two rate cuts this year, given recent softness in the labor market and with monetary policy still a percentage point above our estimate of a neutral stance.