Cracks are starting to appear in a previously strong economy

Real Gross Domestic Product (GDP) growth resumed in Q2 2025, expanding at an estimated 3 percent annual rate after a 0.5 percent dip in Q1. The swing was powered by a record contraction in imports that narrowed the trade gap. Excluding that boost, domestic final demand advanced a modest 1.5 percent leaving the economy on softer foundations.

Labor market conditions remain tight but have been easing for multiple months. Payroll gains hit 158,000 in April, an encouraging sign for the second quarter. However, May and June underwhelmed, and July’s 73,000 new jobs came in considerably below consensus and pushed the unemployment rate to 4.2 percent. Wage growth, as a result, has mellowed.

Inflation edged higher in June 2025, with the headline Consumer Price Index (CPI) rising by 2.7 percent on the year. Both the CPI and Personal Consumption Expenditures (PCE), the Federal Reserve’s preferred measure of inflation, have gained pace over the last two months as tariffs pressure slowly build. However, with price pressure contained, and wage growth normalizing, the Federal Reserve has maintained the funds rate in a 4.25–4.5 percent band since December 2024.

As the dust settles on trade agreements, and business first policies gain traction, economic growth could improve. However, the scale of newly implemented tariffs could offset some of the perceived benefits of recent legislation changes and renewed investment impetus, leaving the U.S. economy open to fluctuations.