Monthly Economic Outlook

Growth: Economic activity remains broadly intact, supported by resilient consumer spending and stable business investment. Our Q3 GDP tracking estimate sits at 2.9% (quarter-over-quarter, annualized), up from 1.6% on average in the first half amid tariff-driven swings in trade and inventories. Despite limited data updates due to the shutdown, we expect 2025 growth to remain at 1.9%. As uncertainty fades and fiscal support builds, we still anticipate modest but sustained expansion, with our 2026 forecast revised up to 1.8%.

Labor market: Conditions remain stable but increasingly fragile. Hiring has slowed, layoffs remain low, and the unemployment rate was at 4.3% in August. We expect it to rise to 4.5% by year-end and remain elevated through mid-2026. Shocks to both labor supply (immigration restrictions) and demand (tariffs, AI, DOGE) have reduced market dynamism. With job creation running at or below breakeven, even modest disruptions could push unemployment higher and test the soft-landing narrative.

Inflation: Price pressures remain elevated. Tariff-related inflation persists, particularly in goods, while non-housing services remain firm. We estimate core PCE inflation at 2.8% year-over-year, with underlying trends closer to 2.3–2.4%, excluding tariffs. Our baseline has core PCE peaking near 3.2% in early 2026 before easing toward the Fed’s 2% target.

Fed: The Federal Reserve cut rates by another 25-basis points (bps) in October, bringing the policy rate just below 4% – a level closer to estimates of neutrality. Policymakers have signaled a shift toward a more balanced stance, citing softer labor demand and persistent inflation. We expect the Fed to continue aligning policy with a long-run neutral rate of 3.25% over the next year. This gradual adjustment reflects growing confidence in a soft landing, albeit risks remain.

Risks: The risk to our baseline outlook remains skewed to the downside (at 35% near-term recession probability), driven by the rapid change in policies across several dimensions: fiscal, immigration and trade – including the Supreme Court’s review of presidential tariff authority. These factors will keep general uncertainty about the future path of economic activity elevated.