This year began with high expectations for the strength of the U.S. economy following strong 2.8% year-over-year growth in gross domestic product in 2024 that was led by consumer spending and helped by business and government spending. Since then, anxiety and confusion have taken center stage in the economy and financial markets as uncertainty over public policy has intensified. It was difficult to judge how policy changes would impact the economy in early 2025 and it remains so now.
So far, economic growth is holding up relatively well, based on the first half of 2024. Adjusted for inflation, GDP fell at an annual rate of 0.5% in the first quarter, but that was mostly reflective of a surge in imports driven by tariff announcements. (Increased imports count as a subtraction in the calculation of GDP.) In contrast, private final sales to domestic purchasers — a measurement that focuses on consumer and business spending — were up 1.9% in the first quarter. That was slower than the 2.9% gain in the prior quarter but indicated continued strength in private sector demand and showed the slowdown has been less than feared. Second-quarter numbers aren’t in yet, but I expect they will show that demand has continued at a modest pace. However, if the large increases in tariffs announced earlier this year take effect and are sustained, they will infiltrate consumer prices, causing a downshift in spending that is likely to spill over into the labor market later in the year with higher unemployment.
On the inflation front, the Personal Consumption Expenditures Price Index, the key indicator used by the Federal Reserve, showed prices were up 2.3% year-over-year in May following 2.1% inflation in April. “Core” prices (which exclude food and energy) were up 2.7%. While the increase in inflation is not necessarily an impending threat, it is moving away from the Fed’s 2% target.
While consumers are worried about tariffs and are uncertain about the future, consumer spending is relatively healthy and they have been willing to spend. Unadjusted for inflation, personal income and consumer spending were both up 4.5% year over year in May. Core retail sales as defined by NRF — based on Census Bureau data but excluding automobile dealers, gasoline stations and restaurants — were up 3.9% unadjusted year over year both for May and the first five months of the year.
Overall, the labor market continues to perform better than expected with recent labor market data correlating with steady spending. Employers added 147,000 jobs in June, in line with the average monthly gain of 146,000 over the past year, and gains during April and May were revised upward by a combined 16,000 jobs. June 4.1% unemployment rate changed little from May, as did the total of 7 million people unemployed. With strong job openings and low layoffs, business have yet to overreact to changes to tariff and trade policy. Job openings rebounded in May to 7.8 million, indicating continued demand for workers, especially in services. Both hires and total separations were little changed at 5.5 million and 5.2 million, respectively, suggesting stability. Based on the most current labor market data, the Federal Reserve is quite unlikely to cut interest rates this month. Nonetheless, the pace of the labor market should keep the Fed on track to reduce rates in the fall.
Fed officials are closely monitoring the “inflation psychology” of consumers — how their expectations about future inflation influence their current spending and saving decisions and whether consumers are influenced by short-term price increases. If households expect inflation to increase and it does, the Fed needs to keep interest rates higher. Alternatively, if everyone believes inflation will be lower and stable, a price shock like tariffs can be absorbed and the Fed could cut interest rates without fear of accelerating inflation. The Fed is clearly weighing its options since uncertainty is high. Officials are waiting to see what develops with inflation psychology and whether near-term worries bleed into long-term inflation expectations. Although there is no clear evidence of tariffs in current prices, it is likely to first appear in the third quarter, which could likely precipitate negative consumption and growth impacts on the economy.
It is difficult to quantify uncertainty. Economists at Stanford and Northwestern have developed an index that measures how much economic uncertainty is caused by government policy changes using news reports, tax code data and variances among economic forecasts. The index gyrated considerably in the first six months of 2025, hitting 705.38 in mid-April, its highest level since the pandemic and exceeding peaks seen during the Great Recession that followed the financial crisis of 2007-2008. In the last full week of June, the index dropped by more than half from April’s peak. While that suggests less nervousness, the policy environment remains very fluid and is making the current situation more complex.
Forecasting the economy has become even more complicated in an environment of heighted policy uncertainties and geopolitical concerns. There are always uncertainties to contend with but the heightened uncertainty we are currently experiencing makes it more difficult to be confident about future spending by consumers and businesses. With an unstable environment, firms typically delay investment and hiring and households are concerned about job security and job prospects, resulting in a cutback on spending.
Economic fundamentals appear solid at this juncture, but uncertainty is pervasive. The economy is still capable of generating economic growth and can likely remain stable. The consumer has been largely resilient throughout recent months, but many are under pressure. There are many crosscurrents surrounding tariffs, immigration and deregulation, and everyone is sorting through what the tariff rates are going to be, how will they impact inflation for retail products and, importantly, how long they will be in place. A key question is whether there be a continued rise in prices. As such, the economy’s path forward and Fed policy decisions are not clear-cut.
Finally, Congress passed the One Big Beautiful Bill Act just in time for President Trump to sign it on his deadline of Independence Day. There are many moving parts in this sweeping spending measure and the yet-to-be-seen reaction of businesses and households, together with the continuing lack of clarity on trade, could greatly alter the economic outlook. We await the next budget and economic outlook report from the Congressional Budget Office later this summer, which will update how the bill is expected to affect federal spending and revenue over the next 10 years. Regardless of its ultimate impact, this initiative provides business incentives, permanent tax cuts for individuals and measures to induce more workforce participation. It meaningfully reduces fiscal policy uncertainty, which is a key factor to forecasting future growth.
In closing this Monthly Economic Review, there is some personal news. On July 1, I stepped down after 15 years as chief economist at NRF, although I will continue serving as NRF’s senior economic advisor, and this is my last monthly commentary. The experiences and insights gained during my tenure are appreciated, and I look forward to contributing to NRF in my new capacity. I thank everyone for their support and collaboration over the years. Working in this specific role will be missed, but the next chapter is exciting.
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