Economic uncertainty abounds
After 11 consecutive quarters of growth, the resilience of the American economic engine is being tested.
U.S. gross domestic product (GDP) shrank by 0.2% in the first quarter of 2025, according to the U.S. Bureau of Economic Analysis’ (BEA) second estimate, published on May 29. (See Figure 1.) This represents the first contraction of the economy since the first quarter of 2022.
For economists, policymakers, businesses, and consumers, uncertainty abounds regarding tariffs, geopolitics, taxes, sovereign debt, and immigration. For most, the biggest source of worry is tariffs: The general consensus is that tariffs will disrupt supply chains and raise the cost of goods for consumers and businesses, which will curtail spending and investments.
As of June 17, the Tax Foundation estimated that new tariffs imposed this year would push the U.S. average tariff rate on imports to 12.4% in 2025. (See Figure 2.) This would be the highest average tariff rate since 1941.
While the Trump administration has argued that tariffs will generate substantial revenues for the federal government, “The challenge is that, as tariff rates go up, a tipping point is reached where the impact of declining imports offsets the impact of a higher tariff rate, thereby leading to an actual decline in revenue,” Deloitte’s economics team said in a recent briefing. “Moreover, as tariff rates rise, economic activity weakens.”
Perhaps more troubling than the imposition of tariffs, however, are persistent questions about whether, how, and when they will take effect and how severe they may be. (For more, see 2025’s tariff roller coaster: A timeline.) Since President Trump returned to office, the White House has continually gone back and forth on individual tariffs, while other countries have announced reciprocal and retaliatory tariffs against the U.S.
Complicating matters, in late May, the Court of International Trade ruled that President Trump does not have authority under the International Emergency Economic Powers Act to impose tariffs on other countries, as he and his administration have maintained. The Court of Appeals for the Federal Circuit has issued an administrative stay of the trade court’s ruling, which maintains the status quo while the administration's appeal is considered.
All of this has left consumers and businesses, including insurers, apprehensive about the economic outlook.
Topping their list of questions is whether inflationary pressures will return. In May, “headline” inflation — as measured by the U.S. Bureau of Labor Statistics’ (BLS) Consumer Price Index (CPI) — rose 2.4% from the previous year, up slightly from the 2.3% year-over-year increase recorded in April. (See Figure 3.) “Core” inflation, which excludes volatile food and energy costs, rose 2.8% year over year in May, unchanged from March and April.
While inflation has proven stickier than the Fed anticipated, policymakers have made significant progress since headline and core inflation peaked in 2022. The May results, however, may be the proverbial calm before the storm. “We expect the impact from higher tariffs will be more visible in consumer prices over the summer and we are closely watching to see where tariff rates settle following the expiry of the 90-day pause on July 9,” J.P. Morgan said in an advisory published after the May inflation figures were announced.
The University of Michigan Index of Consumer Sentiment rose to 60.5 in June. (See Figure 4). This follows steep falls recorded earlier this year, which brought the index down in April and May to one of its lowest levels on record, which dates back to 1952. Despite the modest rise in June, the index remains “about 20% below December 2024, when sentiment had exhibited a post-election bump,” the university said.
“Consumers appear to have settled somewhat from the shock of the extremely high tariffs announced in April and the policy volatility seen in the weeks that followed,” the university continued. “Despite this month’s notable improvement, consumers remain guarded and concerned about the trajectory of the economy.”
Consumer spending — traditionally, the driver of U.S. economic growth — increased just 1.2% in the first quarter of 2025, according to the BEA. (See Figure 5.) This was the slowest pace of growth since the second quarter of 2023. In May, retail sales fell 0.9%, according to advance estimates by the U.S. Census Bureau.
After expressing optimism as President Trump returned to office, CEOs are now pessimistic about the current and future state of the economy. The Conference Board Measure of CEO Confidence fell 26 points in the second quarter to 34, its lowest level since the fourth quarter of 2022. (See Figure 6.) The second-quarter results, based on a survey conducted May 5 through 19, represented the largest quarter-over-quarter decline since The Conference Board’s survey began in 1976.
“CEOs’ views about current economic conditions led the plunge, registering the largest quarter-on-quarter decline in almost 50 years,” said Stephanie Guichard, Senior Economist, Global Indicators, The Conference Board. “Expectations for the future also plummeted, with more than half of CEOs now expecting conditions to worsen over the next six months, both for the economy overall and in their own industries.”
As businesses sought to get ahead of new duties imposed by the Trump administration, imports of goods grew in the first quarter by 53%, the BEA said. (See Figure 7.) This was the largest quarterly increase since the third quarter of 2020, when imported goods more than doubled as businesses reopened following lockdowns at the onset of the pandemic.
By late March, however, imports began to slow. Weekly 20-foot equivalent unit (TEU) shipments — a measure of standard cargo container volumes — bound for the U.S. and from China specifically fell below 2024 levels several times through early May, according to container tracking service Vizion. (See Figure 8.)
Activity rebounded to some degree beginning in mid-May, following the May 12 announcement of a 90-day pause on reciprocal tariffs levied by the U.S. and China, according to Vizion. However, the Port of Los Angeles — North America's busiest container port — reported that TEU imports fell 9% year over year in May. Moreover, the National Retail Federation projected in early June that imports — as measured by TEUs — will fall year over year by:
6.2% in June.
8.1% in July.
14.7% in August.
21.8% in September.
19.8% in October.
Despite the tariff uncertainty, employers added 139,000 nonfarm jobs in May, according to the BLS, slightly fewer than the 147,000 jobs employers added in April. (See Figure 9.) May 2025 marked the seventh consecutive month in which employers added 100,000 or more jobs. The unemployment rate was 4.2% in May, unchanged from April.
At first glance, the labor market appears to be a source of continued strength for the American economy. The May jobs numbers, however, may not reflect recent tariff developments.
Beneath the surface, the dynamics may be shifting as the labor market increasingly favors employers. Companies are no longer rushing to fill vacancies; instead, they are extending hiring timelines as they search for top-tier candidates. This, in turn, is making workers wary of switching jobs.
Although layoffs have increased across some industries, many employers seem to be taking a wait-and-see approach, perhaps hoping for some tariffs to be rescinded. If the trade war escalates, employers may change course and increase terminations later this year.
The Fed is also biding its time as it looks to balance its dual mandate goals of maximizing employment while keeping the cost of goods and services stable. Following its most recent meeting on June 17 and 18, the Federal Open Market Committee announced it would leave interest rates unchanged for now. But at a press conference following the end of the meeting, Fed Chair Jerome Powell noted that the “median [FOMC] participant projects that the appropriate level of the federal funds rate will be 3.9 percent at the end of this year,” down from its current target range of 4.25% to 4.5%.
“Despite elevated uncertainty, the economy is in a solid position. The unemployment rate remains low, and the labor market is at or near maximum employment,” Powell said. “Inflation has come down a great deal but has been running somewhat above our 2 percent longer-run objective…
“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell continued. “If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close. For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.”
In the interim, investors have been restless. The S&P 500 index has vacillated between highs and lows in 2025. (See Figure 10.) Precipitous gains and declines have often followed the introduction and rescission or pause of various tariffs.
Several other factors are complicating the outlook for investors, businesses, consumers, and policymakers:
- Following U.S. strikes on Iranian nuclear sites on June 22, oil markets surged. Initial market concerns centered on Iran’s threatened supply disruptions in the Strait of Hormuz; prices later eased as markets awaited more news. Beyond potential energy impacts, the U.S. action injects fresh uncertainty into the broader economic outlook. Elevated oil prices threaten to further squeeze households, dampen consumer spending, and complicate the Fed’s efforts. Potential attacks on U.S. interests, including possible cyberattacks, also remain significant concerns.
- In May, the House of Representatives passed a sweeping spending and tax policy bill. One goal of the bill is to prevent a $4.5 trillion tax increase in 2026 by extending expiring provisions of the 2017 Tax Cuts and Jobs Act; another is to increase the debt limit so the U.S. does not default on its obligations later this summer. As of this writing, the Senate was still considering its version of the legislation, and lawmakers have set a self-imposed goal to pass compromise legislation before July 4. Lawmakers continue to debate the bill’s broader implications for household finances and the national debt. The nonpartisan Congressional Budget Office said on June 17 that the House version — including "costs associated with servicing the additional debt attributable to legislation" — would add $3.4 trillion to the deficit through 2034.
- Rising concerns about U.S. debt and inflation have pushed bond yields higher, increasing borrowing costs and straining equity markets. These developments may lead to renewed concerns around mark-to-market accounting rules, which require insurers to value assets based on current market prices. When bond yields rise, the market value of existing bond holdings typically falls.
- Federal courts, including the Supreme Court, have issued mixed rulings on actions taken by the Trump administration, such as its efforts to deport undocumented workers, roll back regulations, and terminate senior leaders and workers at independent agencies. (Importantly, the Supreme Court has signaled that President Trump may not have the authority to dismiss Fed Chair Powell.)
One notable sign of encouragement: As of June 18, the Federal Reserve Bank of Atlanta’s GDPNow model — an unofficial “nowcast” of GDP growth based on the most recent economic data, such as housing starts, retail sales, industrial production, and trade figures — indicated that U.S. real GDP will grow by 3.4% in the second quarter. The early forecast by the GDPNow model, which accurately predicted a first-quarter economic contraction before the BEA’s official report, suggests that economic activity may have already rebounded or stabilized.
On the other hand, the World Bank forecast on June 10 that the global economy and the U.S. economy will grow just 2.3% and 1.4%, respectively, in 2025, both down from 2.8% in 2024. The World Bank had estimated in January that the global economy would grow 2.7% this year and the U.S. economy would grow 2.3%.
