Weekly Economic Trends and Indicators
This week, we look back at the economic news of the first half of 2025 and consider how the outlook for the rest of the year may have changed in the last six months. Trade policy seems to have dominated the news, especially since April. Have there been or will there be significant effects on economic performance resulting from tariff changes? Are there other factors that have changed enough to affect the outlook?
Last year ended with the economy performing better than many people had expected. Inflation had come down faster than anticipated. Job growth was mostly robust, though manufacturing job growth had been slowing. The Fed had made some aggressive interest rate cuts, giving people hope that this would continue into 2025. However, by February, in response to a reversal in the inflation numbers and reduced job openings nationwide, I noted in our Quarterly Market Report that, “Because of these factors—a weaker labor market and rising inflation—the economy is more vulnerable to unexpected shocks than it would be were it not for these factors.”
As it turns out, the source of the shock was not unexpected. The fact that tariffs were coming was well-known for months. It was the size of the tariffs, especially the so-called “reciprocal tariffs” announced on April 2nd, that took many by surprise. Furthermore, the additional imports purchased by businesses in the first quarter in anticipation of tariffs were greater than expected. The “pull forward” of imports contributed to the first decline in real GDP since 2022.
As the second quarter commenced, many tariffs were paused, giving markets time to digest the new information. The Federal Reserve, which had last cut their policy interest rate in December, declined to reduce rates further at their May and June meetings amid concerns that tariffs could at least cause a temporary rise in inflation. Meanwhile, tariff revenue increased, inflation moderated slightly, and service sector job growth remained strong.
At the time of this writing, the Atlanta Fed’s GDPNow estimate for second quarter real GDP growth is 2.6%--a substantial rebound from the revised -0.5% decrease in the first quarter. The Blue Chip consensus forecast is centered around 2.0%. With imports likely falling from first quarter levels now that tariffs are in place, the distortion that caused the unusually low first quarter reading should be removed. A growth rate of around 2% would be a better representation of domestic activity, which—while slower than last year—is still healthy. The advance estimate of second quarter GDP will be released on July 30.
Will growth continue at this level for the second half of the year? The vulnerabilities noted earlier are still present. While inflation looks better right now, this is partly due to lower gasoline prices, which are likely temporary. Manufacturing job growth is flat, and unlikely to be revived by tariffs in the short-term. At the same time, a weaker dollar should help our exporters, and investment could be driven higher by companies “reshoring” to avoid tariffs—even with interest rates at current levels. As a result, the outlook for the rest of 2025 is slightly lower than it was six months ago due to these vulnerabilities, but there is upside risk if the negative impacts of tariffs are slow to materialize.
Next week: Mid-year review of the local Quad Cities economy
