S&P Global Ratings believes there is a high degree of unpredictability around policy implementation by the U.S. administration and possible responses—specifically with regard to tariffs—and the potential effect on economies, supply chains, and credit conditions around the world. As a result, our baseline forecasts carry a significant amount of uncertainty, magnified by ongoing regional geopolitical conflicts. As situations evolve, we will gauge the macro and credit materiality of potential shifts and reassess our guidance accordingly [see our research here: spglobal.com/ratings].

This report does not constitute a rating action.

S&P Global Ratings now expects U.S. real GDP growth of 1.7% for the year, up 0.2 percentage points from our previous expectation in May, based on our assumption of lower average effective tariffs and resilient economic data from the first five months of the year. We forecast growth of 1.6% in 2026.

This below-potential growth expectation incorporates our assumptions of lower immigration level, cuts to the federal government workforce, and a more uncertain operating environment for many businesses. We think real GDP growth will weaken to 1.1% by the fourth quarter of 2025, from 2.5% in the fourth quarter of 2024 (see table 1). We anticipate this slowdown in growth will further weaken the labor market in the upcoming quarters.

S&P Global Ratings baseline U.S. economic outlook
June 2025
	--Quarterly data--							--Annual data--
	Q4 2024	Q1 2025	Q2 2025f	Q3 2025f	Q4 2025f	Q1 2026f		2023	2024	2025f	2026f	2027f	2028f
(Period average % change)
Real GDP	2.5	-0.2	3.5	0.3	1.1	1.7		2.9	2.8	1.7	1.6	2.0	2.0
change from May (ppt.)										0.2	-0.1	-0.1	0.1
GDP components (in real terms)
Domestic demand	2.1	3.3	0.0	0.5	1.0	1.8		2.3	3.1	2.0	1.4	2.0	2.1
Consumer spending	4.0	1.2	2.2	1.7	1.5	1.8		2.5	2.8	2.4	1.9	2.1	2.4
Equipment investment	-8.7	24.8	-4.5	-3.9	1.4	2.4		3.5	3.4	4.5	1.6	4.4	4.3
Intellectual property investment	-0.5	4.6	2.9	2.6	1.8	2.9		5.8	3.9	2.5	2.7	3.1	3.5
Nonresidential construction	2.9	-1.4	-2.9	1.2	2.2	0.8		10.8	3.5	-0.7	1.2	1.1	1.4
Residential construction	5.5	-0.6	-3.4	-1.0	-1.2	2.2		-8.3	4.2	-0.7	0.8	2.4	2.1
Federal govt. purchases	4.0	-4.6	-3.6	-5.5	-1.5	0.2		2.9	2.6	-0.6	-1.0	0.0	-0.6
State and local govt. purchases	2.5	1.7	-2.4	-1.8	-0.4	-0.3		4.4	3.9	0.7	-0.6	0.0	-0.1
Exports of goods and services	-0.2	2.4	-2.4	-1.6	-0.4	1.8		2.8	3.3	1.1	1.2	3.0	3.2
Imports of goods and services	-1.9	42.6	-24.0	-1.8	-1.7	1.9		-1.2	5.3	4.9	-0.7	2.8	3.5
Real GDP (4-quarter % change, end of period)	2.5	2.1	2.2	1.5	1.1	1.6		3.2	2.5	1.1	1.9	2.0	2.1
Industrial production	-1.2	5.3	-0.1	-0.2	-0.4	0.2		0.2	-0.3	1.1	0.1	0.5	0.1
CPI (% y/y)	2.7	2.7	2.6	3.1	3.0	2.8		4.1	3.0	2.9	2.8	2.4	1.9
Core CPI (% y/y)	3.3	3.1	2.8	3.0	3.1	3.1		4.8	3.4	3.0	3.1	2.4	2.4
Core PCE price index (% y/y)	2.8	2.8	2.6	2.7	2.9	2.8		4.1	2.8	2.7	2.7	2.0	2.1
Core PCE price index (% y/y, end of period)								3.2	2.8	2.9	2.4	2.0	2.2
Labor Productivity (real GDP/total employment)	1.1	-1.6	2.4	-0.4	0.6	1.3		0.7	1.4	0.6	1.0	1.3	1.3
	Q4 2024	Q1 2025	Q2 2025f	Q3 2025f	Q4 2025f	Q1 2026f		2023	2024	2025f	2026f	2027f	2028f
(Levels)
Unemployment rate (%)	4.2	4.1	4.3	4.4	4.5	4.6		3.6	4.0	4.3	4.6	4.2	4.0
Payroll employment (mil.)	158.6	159.2	159.6	159.9	160.1	160.3		155.9	158.0	159.7	160.6	161.8	163.0
Federal funds rate (%)	4.7	4.3	4.3	4.3	4.0	3.7		5.0	5.1	4.2	3.4	3.1	3.1
10-year Treasury note yield (%)	4.3	4.5	4.4	4.4	4.1	3.9		4.0	4.2	4.3	3.7	3.7	3.8
Mortgage rate (30-year conventional, %)	6.7	6.8	6.6	6.6	6.3	6.0		6.8	6.7	6.6	5.8	5.1	5.0
SOFR (%)	4.7	4.3	4.3	4.3	4.2	3.9		5.0	5.2	4.3	3.4	3.1	3.1
S&P 500 Index	5,911.1	5,900.7	5,690.0	5,711.9	5,830.0	5,883.5		4,284.3	5,426.7	5,783.1	6,028.1	6,325.9	6,695.0
S&P 500 operating earnings (bil. $)	2,073.3	2,008.6	1,778.5	1,873.7	1,875.0	1,952.1		1,787.4	1,966.5	1,884.0	1,946.7	1,976.4	1,988.0
Effective exchange rate index, nominal	133.4	135.5	131.0	130.6	130.4	130.0		128.2	130.9	131.9	129.7	128.6	128.0
Current account (bil. $)	-1,215.8	-1,581.7	-1,195.5	-1,173.9	-1,130.8	-1,111.2		-905.4	-1,133.6	-1,270.5	-1,124.0	-1,096.9	-1,056.6
Personal saving rate (%)	3.8	4.1	3.7	4.4	4.1	4.3		4.7	4.6	4.1	4.5	5.0	5.6
Housing starts (thousand units)	1,387.0	1,395.7	1,315.0	1,292.1	1,284.7	1,325.5		1,420.6	1,370.6	1,321.9	1,351.7	1,384.6	1,435.1
Unit sales of light vehicles (million units)	16.6	16.4	16.1	15.4	14.9	14.9		15.5	15.8	15.7	15.1	15.7	16.0
Quarterly percent change represents annualized growth rate; annual percent change represents average annual growth rate from a year ago. Quarterly levels represent average during the quarter; annual levels represent average levels during the year. Quarterly levels of housing starts and unit sales of light vehicles are in annualized units. CPI--Consumer Price Index. Core CPI is CPI excluding food and energy components. PCE--Personal consumption expenditures. Quarterly levels of CPI, core CPI, and core PCE price index represent year-over-year growth rate during the quarter. Exchange rate represents the nominal trade-weighted exchange value of US$ versus major currencies. Domestic demand is real GDP minus net exports but including change in inventories. Sources: S&P Global Ratings Economics forecasts and S&P Global Market Intelligence Global Linked Model.

The overall narrative hasn’t changed. Even as hard data on economic activity, for now, has held up rather well compared to the recession-level sentiment data, the price and uncertainty shocks in the pipeline limit U.S. growth in the near term while stoking inflation. Price effects have been limited so far (somewhat due to front-running in inventory accumulation to beat tariffs and partly because the majority of tariff increases have been quite recent), but we expect core consumer price inflation to rise once retailers and wholesalers deplete their existing inventory and can’t avoid higher tariffs anymore while restocking.

We think the U.S. economy’s resilience will wear a little thin in the second half of this year, when growth slips below trend and the unemployment rate rises. Real GDP growth looks set to slow through year-end, as relatively high interest rates continue to weigh on residential and nonresidential investment and given the pullback in commercial and consumer spending amid policy uncertainty.

In addition to tariff-related increases in domestic prices and business uncertainty, sharply slowing immigration growth and the cost-savings initiatives by the federal government (including shrinking the federal workforce) could weigh on overall demand as well as supply.

The labor market’s resilience will also be put to test. Payroll employment will dip below 100,000 per month as federal government job cuts and weaker economic growth take hold. Slowing labor force growth should limit a substantial rise in the unemployment rate, even as employment growth slows.

We believe the likely extension of personal income tax cuts from the 2017 Tax Cut and Jobs Act (the main component of the current budget reconciliation debate) will avoid a consumer spending cliff but won’t add to growth since the cuts don’t represent additional stimulus. But a rebound in housing and nonresidential investment amid lower interest rates should improve growth in 2026, in our view. Moreover, we think the (likely to pass) policy of allowing companies to deduct the entire cost of certain investments in the first year will also provide a mild boost to growth next year, because it increases the marginal return on investment, all else equal.

Uncertainty Is Raising Recession Risk

While our base case is that the U.S. will avoid recession in the near term, we think the risk of a downturn is elevated despite the country’s solid growth momentum at the start of the year. Our subjective assessment is that there’s a 30%-35% probability of a downturn starting in the next 12 months--notably higher than the post-World War II unconditional recession probability of 13%.

Uncertainty around trade, deregulation, fiscal policy, geopolitics, and immigration remains elevated. The exact scale and timing of the tariff shock and its repercussions through global production networks are still unknown. It is not yet clear what kind of agreement will emerge from the 90-day negotiation period, particularly with the EU (by July 9) and with China (by Aug. 12).

Additional sectoral tariffs still loom (particularly on semiconductors, pharmaceuticals, copper, and lumber, which are currently exempt) and further increases on sectors already affected cannot be ruled out (such as the doubling of tariffs on steel and aluminum to 50% announced on June 3). The uncertainty surrounding all of this is arguably just as disruptive to the business environment as the sticker shock from tariffs, if not more so.

The rapid escalation of the conflict between Iran and Israel has--for the time being at least--displaced trade and tariffs at the top of a lengthening list of investor concerns. The evolving crisis in the Middle East means the global economic conditions (and forecasts) have become more uncertain, with consequences playing out over medium to long term.

While oil price spikes from past conflicts in the region have usually been short-lived, the threat of supply disruption today (via the Strait of Hormuz) is real. Higher risk premia in the energy market means that our assumed oil prices in our baseline forecast ($60 West Texas Intermediate) may be underappreciating the drag of higher energy prices on the world economy.

That said, the U.S. economy has become more resilient to oil price shocks over time. For the U.S., which is now a net exporter of oil, the current West Texas Intermediate price of $70-$75, if sustained, doesn’t affect our baseline growth forecast and would likely increase headline inflation by about 0.2-0.3 percentage points. A larger ($90+ per barrel) and more prolonged rise in oil prices could have meaningful consequences for real incomes and monetary policy.

Activity And Policy Update

The economy remained remarkably resilient in the first half of the year, despite the swings in tariff rates. A slight contraction in the first quarter reflected unusually high imports (presumably front-running tariffs), a contraction in federal government spending, and softer consumer spending (after a higher than usual fourth quarter), weather events, and the post-election hangover in non-profit business spending.

Extreme data volatility aside, growth in final domestic demand (also known as the final sales to domestic purchasers), which strips away the effects of trade and inventory building and is thus a truer representation of domestic output, was resilient at 2%. That pace was still a step down from the 3% average seen last year, but not as bad as headline GDP growth suggested.

With imports dropping back, the second quarter is on track to expand by a 3%-4% annualized pace. Still, trade tensions and the related uncertainty are weighing on commercial and consumer sentiment in the U.S. and Canada. First-quarter corporate results showed that average estimates for full-year capital expenditure in North America declined 0.1%. Meanwhile, business and consumer sentiment indices have trended sharply downward since the start of the year, with some recovery in the latter half of May only after the pause on tariffs on some goods from China.

At the same time, net immigration growth in the U.S. has slowed to a trickle, with the southern border essentially closed and deportations increasing. The eventual effect on labor supply will almost certainly weigh on economic activity.

Also, roughly 59,000 federal government jobs have been cut so far this year, with many more to come. We expect state and local governments, the health care sector, and universities to do much less hiring as they brace for declines in federal grants.

Core inflation to exceed 3% by the fourth quarter

We forecast that core consumer price inflation will rise to 3.0%-3.5% by the fourth quarter. Given the prevailing uncertainty, we now think tariff increases will take longer to show in consumer prices, thus lengthening and diluting the inflationary impulse. However, inventory restocking will expose more firms to tariffs in the coming months.

Despite a sharp rise in household inflation expectations and a marked upturn in input prices in business sentiment surveys, hard inflation data has been tame considering the tariffs already in place since February. Long-lagged relative service price adjustments (for example, the shelter component of the Consumer Price Index) and weaker travel and accommodation services have put a lid on core price inflation while lower energy prices have helped overall inflation.

But core goods prices, which were generally deflationary before the pandemic, haven’t moved up significantly either (just a 0.7% seasonally adjusted annual increase in the three months through May compared with the previous three months). This suggests that companies haven’t immediately (or fully) passed higher prices on to consumers--at odds with what most survey data suggests.

We suspect companies may be accepting lower margins for the moment to preserve market share until tariff rates settle. The effective tariff rates put in place have generally ended up being far less than first announced, although still significant, especially with respect to China. May tariff revenue suggests the effective tariff rate (estimated 6%) was approximately 3x higher than a year ago.

This is still far lower than what is consistent with announced actual effective tariff rates on new imports, likely due to reasons such as:

• flexible payment windows by U.S. Customs and Border Protection that allow importers to pay tariffs as late as the 15th of the following month,
• bonded warehouses where imported goods are stored and duties aren’t paid until the goods leave the warehouse (at the duty rate upon extraction), and
• potential evasion.

Sooner or later, inflation is likely to head higher in the months ahead as tariffs filter through to consumer prices. We continue to expect that sector-specific tariffs will be implemented on semiconductors, refined copper, lumber, and pharmaceuticals on top of existing tariffs on steel and aluminum and autos. We also assume that the U.S. will reach deals with many of its large trading partners with tariff rates closer to 10%. We think Canada and Mexico are likely to see lower than 10% when all is said and done while China is likely to continue to face a 40% levy, which when combined with sectoral tariffs would leave the U.S.’ overall effective rate at 15%. For now, we assume a 50% effective pass-through to the consumers’ price level, spread over 12 months.

Fed In A Bind

Rising unemployment (given slowing economic activity) and persistent above-target price pressures put the Federal Reserve in a difficult position to meet its dual mandate of stable prices and maximum sustainable employment.

For now, we anticipate 50 basis points of easing in the fourth quarter of 2025, as the unemployment rate begins to move higher than the longer-run steady state and the Fed chooses to view tariff-related inflation as temporary. That said, if consumer price inflation remains tame and consumption soft, the Fed may lean on its risk management playbook to cut rates by 25 basis points earlier in the second half--akin to a preemptive “insurance” cut--to provide cushion to the economy while there is an opportunity to do so given the delay before the tariff pass-through shows in the data.

We expect further cuts in 2026 to bring the policy rate to its nominal neutral of 3.00%-3.25% by year-end.

An Uncertain Outlook

Our baseline forecasts represent the middle of the likely range of outcomes, after accounting for routine and nonroutine assumptions, such as tariffs. Fluctuations in real GDP in the next two years mainly depend on movements in aggregate demand, although they are also affected by supply-related factors--such as immigration, taxes on imported goods and labor, and effects on the cost of new investments. Economic projections for later years mainly reflect the factors that underlie aggregate supply and determine potential output.

Uncertainty regarding supply-related factors is unusually high due to the unpredictability of the structure of tariffs, immigration, the size of the federal government, and tax policies. In addition, policy uncertainty could delay business decisions. Besides, there are still questions surrounding new technology-related investment and subsequent productivity growth.

Likewise, revisions to data published by government statistical agencies remain prone to large revisions, and COVID-19 whiplash has made adjustments of seasonality more difficult than usual. Survey-based private sector sentiment data has also been less reliable than usual as a guide, given sampling issues.

The balance of risks to our baseline GDP growth forecasts are tilted to the downside for 2025. Downside risks include more cautious consumer and government spending, while upside risks include stronger private fixed investment outlays. The balance of risks to our inflation forecasts are tilted to the upside: Energy prices could stay materially above our current assumption, and tariff rates could settle higher and pass through more than we have assumed.

Chief Economist, U.S. and Canada:

Satyam Panday, San Francisco 1-212-438-6009; satyam.panday@spglobal.com