A range of private‑sector and international forecasters have warned that the US economy is set to decelerate sharply over the coming year, pointing to faltering consumer spending, weakening industrial activity and the lingering effects of high interest rates. After a stretch of above–trend growth in 2023 and early 2024, analysts now expect real GDP expansion to ease from roughly 2.5 percent last year to nearer 1.5 percent by the end of 2025. While a technical recession is not yet in the consensus forecast, the risk that growth could slip into negative territory has heightened, driven by an inverted yield curve, caution among households and businesses, and ongoing global uncertainties.
Softening Consumer and Business Sentiment
Consumer confidence has retreated from its recent highs, as households wrestle with elevated borrowing costs, sticky inflation in services sectors and rising energy prices. Retail sales data through the spring showed a pullback in discretionary spending—particularly on big‑ticket items such as automobiles and home furnishings—that had briefly surged ahead of last year’s import tariff deadlines. Surveys of purchasing managers have likewise signaled a slowdown: new orders in manufacturing have declined for several consecutive months, and service‑sector firms report softer demand for everything from logistics to leisure. The combination of tighter credit conditions—mortgage rates are hovering near 7 percent—and uncertainty over future policy moves has dampened the willingness of consumers to open their wallets and of companies to expand payrolls or capital outlays.
Perhaps the most closely watched signal of a pending slowdown is the inversion of the yield curve, where short‑term Treasury yields exceed those on longer maturities. Historically, such inversions have preceded recessions by an average of 12 to 18 months. Moreover, the Conference Board’s leading economic index has now fallen for eight of the past nine months, with downward revisions to prior data underscoring the streak’s persistence. Business inventories have climbed relative to sales, suggesting that production may outpace demand in coming quarters. Corporate credit spreads have widened, reflecting an uptick in perceived risk among investment‑grade borrowers, and bank lending standards have tightened in response to regulatory scrutiny and pressures on bank balance sheets.
Policy Challenges Ahead
Policymakers face a delicate balancing act. With core inflation still above the Federal Reserve’s 2 percent target and wage gains persisting at an annual pace near 4 percent, the central bank has maintained policy rates at their highest level in over two decades. Yet the Fed’s own projections show that even without further tightening, growth is likely to slow toward stall‑speed. Some regional Fed presidents have cautioned against cutting rates prematurely—arguing that doing so risks reigniting inflation—while others have signaled openness to rate reductions if data confirm a sustained downturn. On Capitol Hill, legislators are debating the scope of fiscal support: proposals range from targeted relief for struggling lower‑income families to infrastructure spending that could provide a modest lift to investment and employment.
Beyond domestic fundamentals, external factors could further temper US growth. Global trade remains subdued amid lingering trade disputes and supply‑chain realignments, while a resurgence of COVID‑19 variants in major trading partners could dampen export demand. Tensions in the Middle East have driven oil prices higher, adding to transportation and manufacturing costs. Meanwhile, China’s slower recovery following years of pandemic restrictions has weighed on US exporters of agricultural products and capital goods. Experts warn that should any of these cross‑currents intensify, they could tip the economy from a moderate slowdown into outright contraction.
Labour Market Resilience and Risks
One of the economy’s bright spots has been the labour market, which has added jobs at a robust clip and kept unemployment near historic lows. Yet there are signs that momentum is ebbing: job openings have declined from their peaks, and quit rates have moderated, suggesting fewer workers are voluntarily leaving positions. Wage growth, while still elevated, has slowed compared to last year’s red‑hot pace. Economists caution that a rapid deterioration in hiring could spark a feedback loop—lower incomes leading to weaker spending, in turn prompting firms to cut back further on headcount.
The trajectory of inflation will be a critical determinant of future rate policy. Food and energy price volatility continues to challenge efforts to bring headline inflation down, even as core measures—excluding these volatile components—have trended toward the Fed’s goal. Many analysts expect headline CPI to return to near 2 percent by mid‑2026, assuming no major supply shocks. If that materializes, the Fed could begin reducing rates by late 2025 to cushion the slowdown. However, if inflation proves more persistent—driven by tight labour markets or new fiscal stimuli—rates may remain elevated for longer, further weighing on growth.
Housing Market and Consumer Balance Sheets
The housing sector has been particularly sensitive to rate hikes. After a brief resurgence earlier this year, mortgage applications for home purchases have tumbled, while existing home sales and housing starts have decelerated. This slowdown not only affects home builders and real estate agents but also dent consumer confidence and household wealth, as home equity is a key source of financial security for many Americans. Although household debt‑to‑income ratios remain below their pre‑crisis peaks, higher interest costs on credit cards, auto loans and student debt are squeezing budgets, leading households to draw down savings or delay major expenditures.
On the business side, capital expenditures are expected to moderate after a period of catch‑up spending on technology and equipment. Supply‑chain diversification efforts and reshoring initiatives had prompted firms to bolster inventories and capacity, but many now face excess stock and are postponing additional outlays. Profit margins, which expanded during the pandemic as companies passed higher costs onto consumers, are under pressure from slower revenue growth and still‑elevated input prices. In sectors such as semiconductors and renewable energy, government incentives—like the CHIPS Act and green energy tax credits—are providing some cushion, but analysts warn that these will not fully offset broader headwinds.
For households, a prolonged period of sub‑trend growth could mean stagnant wages and fewer opportunities for career advancement, particularly for younger workers entering the labour force. Rising living costs combined with slower income growth may lead to increased defaults on consumer loans and a rise in financial stress. Financial markets have already begun to price in a softer outlook: equity valuations have become more conservative, and volatility indices have ticked upward. Fixed‑income investors, meanwhile, are repositioning for lower yields but remain wary of inflation surprises.
As growth moderates, both policymakers and private actors will seek ways to cushion the blow. Federal and state governments could deploy targeted fiscal measures—such as expanded unemployment benefits or infrastructure grants—to support local economies. Companies may accelerate cost‑control programs and focus on efficiency gains rather than expansion. Consumers, for their part, may shift spending toward essentials and delay discretionary purchases, prompting a renewed emphasis on value‑oriented retail and services.
Looking ahead, experts caution that the timing and severity of the slowdown will depend on the interplay between monetary policy, inflation dynamics and global developments. Should the Federal Reserve successfully engineer a “soft landing”—cooling the economy just enough to tame inflation without triggering a deep recession—the US may still achieve modest growth near its long‑term potential. If not, the country could face a harsher contraction, testing the resilience of businesses, households and financial institutions alike.
(Source:www.marketwatch.com)
Softening Consumer and Business Sentiment
Consumer confidence has retreated from its recent highs, as households wrestle with elevated borrowing costs, sticky inflation in services sectors and rising energy prices. Retail sales data through the spring showed a pullback in discretionary spending—particularly on big‑ticket items such as automobiles and home furnishings—that had briefly surged ahead of last year’s import tariff deadlines. Surveys of purchasing managers have likewise signaled a slowdown: new orders in manufacturing have declined for several consecutive months, and service‑sector firms report softer demand for everything from logistics to leisure. The combination of tighter credit conditions—mortgage rates are hovering near 7 percent—and uncertainty over future policy moves has dampened the willingness of consumers to open their wallets and of companies to expand payrolls or capital outlays.
Perhaps the most closely watched signal of a pending slowdown is the inversion of the yield curve, where short‑term Treasury yields exceed those on longer maturities. Historically, such inversions have preceded recessions by an average of 12 to 18 months. Moreover, the Conference Board’s leading economic index has now fallen for eight of the past nine months, with downward revisions to prior data underscoring the streak’s persistence. Business inventories have climbed relative to sales, suggesting that production may outpace demand in coming quarters. Corporate credit spreads have widened, reflecting an uptick in perceived risk among investment‑grade borrowers, and bank lending standards have tightened in response to regulatory scrutiny and pressures on bank balance sheets.
Policy Challenges Ahead
Policymakers face a delicate balancing act. With core inflation still above the Federal Reserve’s 2 percent target and wage gains persisting at an annual pace near 4 percent, the central bank has maintained policy rates at their highest level in over two decades. Yet the Fed’s own projections show that even without further tightening, growth is likely to slow toward stall‑speed. Some regional Fed presidents have cautioned against cutting rates prematurely—arguing that doing so risks reigniting inflation—while others have signaled openness to rate reductions if data confirm a sustained downturn. On Capitol Hill, legislators are debating the scope of fiscal support: proposals range from targeted relief for struggling lower‑income families to infrastructure spending that could provide a modest lift to investment and employment.
Beyond domestic fundamentals, external factors could further temper US growth. Global trade remains subdued amid lingering trade disputes and supply‑chain realignments, while a resurgence of COVID‑19 variants in major trading partners could dampen export demand. Tensions in the Middle East have driven oil prices higher, adding to transportation and manufacturing costs. Meanwhile, China’s slower recovery following years of pandemic restrictions has weighed on US exporters of agricultural products and capital goods. Experts warn that should any of these cross‑currents intensify, they could tip the economy from a moderate slowdown into outright contraction.
Labour Market Resilience and Risks
One of the economy’s bright spots has been the labour market, which has added jobs at a robust clip and kept unemployment near historic lows. Yet there are signs that momentum is ebbing: job openings have declined from their peaks, and quit rates have moderated, suggesting fewer workers are voluntarily leaving positions. Wage growth, while still elevated, has slowed compared to last year’s red‑hot pace. Economists caution that a rapid deterioration in hiring could spark a feedback loop—lower incomes leading to weaker spending, in turn prompting firms to cut back further on headcount.
The trajectory of inflation will be a critical determinant of future rate policy. Food and energy price volatility continues to challenge efforts to bring headline inflation down, even as core measures—excluding these volatile components—have trended toward the Fed’s goal. Many analysts expect headline CPI to return to near 2 percent by mid‑2026, assuming no major supply shocks. If that materializes, the Fed could begin reducing rates by late 2025 to cushion the slowdown. However, if inflation proves more persistent—driven by tight labour markets or new fiscal stimuli—rates may remain elevated for longer, further weighing on growth.
Housing Market and Consumer Balance Sheets
The housing sector has been particularly sensitive to rate hikes. After a brief resurgence earlier this year, mortgage applications for home purchases have tumbled, while existing home sales and housing starts have decelerated. This slowdown not only affects home builders and real estate agents but also dent consumer confidence and household wealth, as home equity is a key source of financial security for many Americans. Although household debt‑to‑income ratios remain below their pre‑crisis peaks, higher interest costs on credit cards, auto loans and student debt are squeezing budgets, leading households to draw down savings or delay major expenditures.
On the business side, capital expenditures are expected to moderate after a period of catch‑up spending on technology and equipment. Supply‑chain diversification efforts and reshoring initiatives had prompted firms to bolster inventories and capacity, but many now face excess stock and are postponing additional outlays. Profit margins, which expanded during the pandemic as companies passed higher costs onto consumers, are under pressure from slower revenue growth and still‑elevated input prices. In sectors such as semiconductors and renewable energy, government incentives—like the CHIPS Act and green energy tax credits—are providing some cushion, but analysts warn that these will not fully offset broader headwinds.
For households, a prolonged period of sub‑trend growth could mean stagnant wages and fewer opportunities for career advancement, particularly for younger workers entering the labour force. Rising living costs combined with slower income growth may lead to increased defaults on consumer loans and a rise in financial stress. Financial markets have already begun to price in a softer outlook: equity valuations have become more conservative, and volatility indices have ticked upward. Fixed‑income investors, meanwhile, are repositioning for lower yields but remain wary of inflation surprises.
As growth moderates, both policymakers and private actors will seek ways to cushion the blow. Federal and state governments could deploy targeted fiscal measures—such as expanded unemployment benefits or infrastructure grants—to support local economies. Companies may accelerate cost‑control programs and focus on efficiency gains rather than expansion. Consumers, for their part, may shift spending toward essentials and delay discretionary purchases, prompting a renewed emphasis on value‑oriented retail and services.
Looking ahead, experts caution that the timing and severity of the slowdown will depend on the interplay between monetary policy, inflation dynamics and global developments. Should the Federal Reserve successfully engineer a “soft landing”—cooling the economy just enough to tame inflation without triggering a deep recession—the US may still achieve modest growth near its long‑term potential. If not, the country could face a harsher contraction, testing the resilience of businesses, households and financial institutions alike.
(Source:www.marketwatch.com)