A new economic normal
For several quarters now, the Lockton Market Update has made note of the significant uncertainty associated with the state of the economy. As we close out the year, that uncertainty has only deepened.
Under normal circumstances, official data on the U.S. economy’s real gross domestic product (GDP) growth in the third quarter would be available by now. But because of the recent government shutdown, the Bureau of Economic Analysis' (BEA) advance estimate of third-quarter growth — originally scheduled for publication on Oct. 30 — was canceled. The BEA now plans to publish an initial estimate for the third quarter on Dec. 23.
This leaves businesses and policymakers without a definitive read on economic direction and momentum. And forecasts from various other respected sources suggest a wide range of possible third-quarter outcomes:
Professional forecasters surveyed by the Federal Reserve Bank of Philadelphia predicted in August that real GDP would grow at an annual rate of 1.3% in Q3.
The Federal Reserve Bank of New York’s Staff Nowcast forecast growth at an annual rate of 2.3% as of Nov. 28.
The Federal Reserve Bank of Atlanta’s GDPNow model estimated growth at an annual rate of 3.5% as of Dec. 5.
Longer-term projections indicate slow growth ahead. The International Monetary Fund (IMF) forecast on Oct. 14 that the U.S. economy will grow 2.0% in 2025 and 2.1% in 2026. The IMF forecasts that the global economy will grow 3.2% in 2025 and 3.1% in 2026.
Investors optimistic about AI, concerned about tariffs
Although the stock market is not a perfect reflection of the overall economy, it can be a useful gauge of investor sentiment. The S&P 500 index has climbed to new heights in 2025, closing at an all-time high of 6,890.89 on Oct. 28 and reaching an intraday high of 6,920.34 on Oct. 29. (See Figure 1.)
But the headline highs mask significant volatility. The index has closed down 2 percentage points or more from the previous day on five separate occasions in 2025, including a 4.84% drop on April 3 and a 5.97% drop the very next day. These represent the two largest daily percentage losses since the 2020 COVID-19-driven crash and — on a point basis — the second- and third-largest daily losses in the index’s history.
These market swings reflect investor unease about the underlying health of the economy, and behind even the positive market developments are signs of trouble.
A major driver of the market’s trajectory is the ongoing boom in AI. Investor enthusiasm has concentrated gains in a small group of companies on the leading edge or that are able to deploy these advanced technologies at scale. This concentration distorts the market by funneling capital toward AI-favored sectors at the expense of other segments.
The result is a market that appears strong on the surface but is less reflective of broader economic health. As a result, any bad news can have an amplified effect. While AI promises meaningful long-term productivity gains, its benefits have been unevenly distributed. Rapid adoption has displaced jobs, widened wealth gaps, and delivered a two-tiered economy in which AI-powered companies thrive and foundational sectors lag.
Market volatility has highlighted other areas of concern for investors. For example, several of the steepest declines in 2025 have followed announcements related to tariffs. The overall average effective tariff rate inched up to 16.8% as of Nov. 17, according to the Budget Lab at Yale. (See Figure 2.) This is the highest effective tariff rate since 1935.
Many of the tariffs imposed by President Trump under the International Emergency Economic Powers Act (IEEPA) could ultimately be invalidated as the Supreme Court weighs two tariff cases challenging whether a president has such authority under the statute.
The IEEPA levies, however, accounted for less than half of the tariff revenue — approximately $90 billion out of $195 billion in total — the government collected in fiscal year 2025, which ended on Sept. 30, according to an analysis by the nonpartisan Committee for a Responsible Federal Budget. Without the IEEPA tariffs in place, the effective tariff rate drops to 9.3%, according to the Budget Lab.
In a historical context, that figure is still elevated, representing the highest effective tariff rate since 1946. Moreover, the potential invalidation of the tariffs could introduce a new layer of economic uncertainty, as the federal government may be required to repay billions of dollars collected thus far.
The Supreme Court heard oral arguments in the two tariff cases, Learning Resources, Inc. v. Trump and Trump v. V.O.S. Selections, in early November. Although the court generally issues rulings months after oral arguments, the Trump administration has requested an expedited decision.
Consumer, business confidence wavering
Tariffs, the record-long 43-day government shutdown, and other pressures continue to weigh on consumers and businesses. After declining for four consecutive months, from 61.7 in July to 51.0 in November, the University of Michigan Index of Consumer Sentiment rebounded slightly in December, rising to 53.3. (See Figure 3.)
“Consumers see modest improvements from November on a few dimensions, but the overall tenor of views is broadly somber, as consumers continue to cite the burden of high prices," the university said.
One positive sign: U.S. Black Friday retail sales were up 4.1% year over year, according to Mastercard. On the other hand, the New York Fed reported that U.S. household debt grew by nearly $200 billion in the third quarter, to a record high of $18.59 trillion.
Meanwhile, The Conference Board Measure of CEO Confidence fell from 49 in the third quarter of 2025 to 48 in the fourth quarter. (See Figure 4.) Q4 marks the third consecutive quarter in which the measure has sat below 50, indicating that more CEOs are expressing negative sentiments than positive ones.
“CEO confidence weakened slightly in the fourth quarter, signaling continued caution among leaders of large firms,” said Stephanie Guichard, a senior economist at The Conference Board. “CEOs’ views of general economic conditions now versus six months ago remained slightly negative while CEOs’ six-month expectations for the economy turned from neutral to pessimistic. CEOs’ expectations for their own industry were stable, still showing cautious optimism.”
Small businesses have generally been more upbeat in 2025, but remain wary about the labor market and overall economic conditions. After falling from 110.8 in August to 98.2 in October, the National Federation of Independent Business (NFIB) Small Business Optimism Index rose slightly in November, to 99.0. (See Figure 5). The NFIB Uncertainty Index rose 3 points from October to 91.
Inflation, job market sending mixed signals
With the ultimate fate of 2025’s tariffs still unknown, concerns about inflation remain top of mind. Inflation continues to be a stubborn challenge for policymakers and a key variable shaping consumer behavior and business investment decisions. In recent months, year-over-year “headline” inflation — the topline Consumer Price Index (CPI) figure reported monthly by the U.S. Bureau of Labor Statistics (BLS) — has slowly inched back up, from a post-pandemic low of 2.3% in April to 3.0% in September. (See Figure 6.)
Core inflation — which excludes volatile food and energy costs — has also drifted upward, rising from 2.8% year over year in March, April, and May to as high as 3.1% in July and August and 3.0% in September.
To be sure, inflation in 2025 is far from the problem it was in 2022, when headline and core inflation climbed as high as 9.1% and 6.6%, respectively. But it’s also well above the Federal Reserve’s target of 2% — and appears to once again be on the wrong track, which complicates interest rate decisions, limits policy flexibility, and risks further dampening of consumer sentiment.
In September, employers added 119,000 jobs, according to the BLS, a surprising figure given more modest gains in recent months. (See Figure 7.) But the BLS revised downward previous estimates for July and August by a total of 33,000. The latest figures show that employers added 72,000 jobs in July rather than 79,000, and lost 4,000 jobs in August instead of adding 22,000 as initially reported. The unemployment rate edged upward from 4.3% in August to 4.4% in September, the BLS said.
While the BLS published inflation figures and employment data — after a delay — for September, the agency made the unusual decision in late November to cancel the release of October numbers. The BLS cited the inability of staff to collect the necessary data during the recent shutdown.
Data from other sources paints a more concerning picture of policy shifts and macroeconomic conditions reshaping employment dynamics. Private sector employment fell by 38,000 jobs from October to November, according to payroll processor ADP’s National Employment Report. (See Figure 8.)
“Hiring has been choppy of late as employers weather cautious consumers and an uncertain macroeconomic environment,” said Dr. Nela Richardson, chief economist, ADP. “And while November's slowdown was broad-based, it was led by a pullback among small businesses.”
More tellingly, U.S. employers are laying off workers in large numbers. Companies announced more than 150,000 job cuts in October and another 70,000 cuts in November, according to global outplacement and executive coaching firm Challenger, Gray & Christmas. Through November, employers have announced 1.2 million job cuts in 2025, more than double the 761,000 cuts announced through the first 11 months of 2024 and the most since 2.2 million cuts were announced during the same period in 2020.
Impacts from the Department of Government Efficiency (DOGE) cuts are the most frequently cited reason for job losses so far in 2025, accounting for nearly 300,000 layoffs. This includes 21,000 job cuts resulting from downstream DOGE impacts, such as the loss of federal funding. Market and economic conditions have been cited as the reason for nearly 250,000 layoffs.
The shutdown itself may also have lingering impacts on the labor market. Approximately 60,000 private sector workers lost their jobs as a result of the shutdown, National Economic Council Director Kevin Hassett told reporters on Nov. 13. Shutdown-related exposures can often have a multiplier effect, delaying investment, slowing procurement, and creating uncertainty for contractors and suppliers. Some government employees may also seek alternate employment options in the private sector to avoid future paycheck disruptions.
Americans appear to have mixed views about the state of the labor market. In a survey conducted by The Conference Board in November, 27.6% of consumers said jobs were “plentiful,” down from 28.6% in October. At the same time, 17.9% said jobs were “hard to get,” down from 18.3%.
These trends highlight a labor market consistent with an economy in transition, offering opportunity for certain high-skill workers but more challenging conditions for others. Slower job creation and flat wage growth also suggest the labor market is cooling more quickly than many expected, with the scale and pace of job cuts reflecting how quickly companies are adjusting to slower demand, margin pressure, and policy uncertainty.
Fed’s uncertain path
Following its final meeting of the year, which concluded on Dec. 10, a divided Federal Open Market Committee announced a one-quarter percentage point reduction of the federal funds target rate, to a range of 3.5% to 3.75%. This follows two previous reductions of one-quarter percentage point each that the Fed announced in September and October.
“Although some key government data have yet to be released, available indicators suggest that economic activity has been expanding at a moderate pace,” Fed Chair Jerome Powell said during a press conference following the conclusion of the Fed’s most recent meeting. “Consumer spending appears to have remained solid, and business fixed investment has continued to expand.
“In contrast, activity in the housing sector remains weak. The temporary shutdown of the federal government has likely weighed on economic activity in the current quarter, but these effects should be mostly offset by higher growth next quarter, reflecting the reopening. …
“The official report on the labor market for September — the most recent release — show that the unemployment rate continued to edge up, reaching 4.4%, and that job gains had slowed significantly since earlier in the year. A good part of the slowing likely reflects a decline in the growth of the labor force due to lower immigration and labor force participation, though labor demand has clearly softened as well. In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen in recent months. …
“Inflation has eased significantly from its highs in mid-2022, but remains somewhat elevated relative to our 2% longer run goal. Very little data on inflation have been released since our meeting in October. … Inflation for goods has picked up, reflecting the effects of tariffs. In contrast, disinflation appears to be continuing for services. Near-term measures of inflation expectations have declined from their peaks earlier in the year, as reflected in both market- and survey-based measures. Most measures of longer-term expectations remain consistent with our 2% inflation goal. …
“In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside — a challenging situation. … Our framework calls for us to take a balanced approach in promoting both sides of our dual mandate. Accordingly, we judged it appropriate at this meeting to lower our policy rate by a quarter-percentage point. …
“This further normalization of our policy stance should help stabilize the labor market while allowing inflation to resume its downward trend toward 2% once the effects of tariffs have passed through.”
Future Fed policy actions remain uncertain due to differing viewpoints among policymakers, Powell’s impending departure, and the challenge of balancing the Fed's dual mandate of controlling inflation while also supporting employment.
