It’s a challenging time for the United States economy. It projects for inflation to come down slowly, with it projected to be at 2% in two years from now. Signs from the economy show that tariffs are creating a short-term inflationary rise. If this continues, rates will be jumping to around 3% this year alone. Experts argue that these stumbling blocks do not indicate a weakness in the job market. They claim that the economy is actually doing pretty darn well nationally.
The Federal Reserve is to be commended for making this key observation. They estimate that tariffs are adding about a fourth of a percentage point to today’s inflation rate. This third factor adds some uncertainty to the economic outlook, as higher prices may begin to erode consumer purchasing power and affect businesses’ capital spending decisions.
As the year goes on, we foresee year-over-year real GDP growth slowing to around 1%. It’s a positive signal amid a general theme of slowing down with the economy. Industries across the economy are most recently bending to pressures from home and abroad. Economists agree that although growth is slowing, it’s very important to look at how these conditions compound with inflationary trends.
Most surprising of all is the job market’s resilience in the face of these major changes. Many analysts are forecasting more of the same economic strength. They do look for a bit of an offset given the unemployment rate is projected to increase, to about 4.5% by year’s end. This bump is interpreted as a sign of maturity, the natural reaction to a slower growth world, a still evolving shakeout in key sectors like Retail and Manufacturing.
In sum, although inflation is expected to slowly come down, the immediate effects of tariffs may get in the way of this path. The Federal Reserve will need to be mindful of these dynamics going forward as it walks the line in making monetary policy decisions in an uncertain economy.