Open questions hang over economy
After shrinking in the first quarter of 2025, the U.S. economy has since rebounded. U.S. real gross domestic product (GDP) grew at an annual rate of 3.3% in the second quarter, according to the U.S. Bureau of Economic Analysis' (BEA) second estimate, published on Aug. 28. (See Figure 1.)
“The increase in real GDP in the second quarter primarily reflected a decrease in imports, which are a subtraction in the calculation of GDP, and an increase in consumer spending,” the BEA said. “These movements were partly offset by decreases in investment and exports.”
On the surface, the second-quarter results are encouraging, as is the recent performance of the stock market. While tariffs fueled volatility earlier in the year, strong earnings reports by many companies of late have helped steady investor confidence. The S&P 500 has set new records multiple times since late June, closing at a peak of 6,693.75 on Sept. 22. (See Figure 2.)
But neither the stock market nor topline GDP figures tell the whole story.
The stock market, for example, reflects investor sentiment and expectations about corporate earnings versus the day-to-day realities of households. It tends to be heavily influenced by factors such as interest rates, monetary policy, and technology sector performance, all of which can diverge significantly from broader economic conditions.
Meanwhile, the GDP swings in the first and second quarters occurred as trade and inventories rapidly shifted amid tariff-related uncertainty. Overall, the U.S. economy grew modestly in the first half of the year, by an annual rate of 1.4%.
As of Sept. 17, 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 — projected that U.S. real GDP will grow by 3.3% in the third quarter. Other credible sources anticipate more modest growth for the remainder of 2025:
The World Bank, in its June forecast, projected global and U.S. economic growth of 2.3% and 1.4%, respectively, in 2025, both down from 2.8% in 2024.
The International Monetary Fund forecast in July that the global and U.S. economies will grow 3.0% and 1.9%, respectively, down from 3.3% and 2.8%, respectively, in 2024.
Tariff roller coaster continues
While there is somewhat more clarity around tariffs today than when we published our June 2025 Lockton Market Update, key uncertainties remain. Chief among these: where U.S. and global trade policy will land and how that will affect consumer spending. As of Sept. 4, the overall effective tariff rate for American consumers is 17.4%, according to The Budget Lab at Yale University, the highest since 1935. (See Figure 3.)
While there is ongoing debate about the extent to which tariff-related expenses are being absorbed by businesses versus being passed on to consumers, it is clear that individual Americans are already feeling pressure, which could intensify in the months ahead. This could point to trouble: As of the second quarter of 2025, consumer spending accounted for 68% of U.S. GDP, according to the Federal Reserve Bank of St. Louis.
In the third quarter, the White House has promoted tentative trade agreements with several key trading partners, including the European Union, Japan, and South Korea. Many of the details of these deals remain in question; in some cases, the parties involved appear to have differing interpretations of their terms — or second thoughts about the agreements.
For example, on July 22, the Trump administration announced a preliminary deal with Japan that would impose a 15% tariff on all Japanese goods imported into the U.S. However, this was a verbal understanding rather than a formal written agreement, and the two governments have since expressed conflicting views on its provisions. Meanwhile, media reports in early September indicated that the U.S. deal with the EU — which the European Parliament is expected to vote on in October — was in jeopardy as member states and businesses questioned the terms of the agreement.
Questions also remain about the legality of many tariffs introduced by President Trump. In late August, the U.S. Court of Appeals for the Federal Circuit ruled that the president, in imposing many reciprocal tariffs this year, exceeded his authority under the International Emergency Economic Powers Act. The decision largely upheld a ruling by the International Court of Trade earlier this year. The appeals court, however, ruled that the tariffs should remain in place through mid-October as the administration pursues an appeal to the Supreme Court, which agreed in September to fast-track the case.
Consumers & businesses remain uncertain
Data suggests that tariffs are already influencing consumer sentiment and behavior. After slowing to just 0.5% growth in the first quarter, consumer spending rose by a modest 1.6% in the second quarter, according to the BEA. (See Figure 4.) Business investments, in contrast, fell sharply, by 13.8%.
Both consumers and businesses are showing persistent unease about the broader economic outlook. The University of Michigan Index of Consumer Sentiment fell from 61.7 in July to 58.2 in August and 55.4 in September. (See Figure 5.) While sentiment has rebounded to some degree from its low of 52.2 in April and May — only slightly above the index’s all-time lows of 50.0 and 51.5 set in June and July 2022 — we remain in one of the worst periods in the index’s history, which dates back to 1952.
"Consumers continue to note multiple vulnerabilities in the economy, with rising risks to business conditions, labor markets, and inflation,” the university said. “Likewise, consumers perceive risks to their pocketbooks as well.”
Surveys of senior business executives suggest similar thinking. The Conference Board Measure of CEO Confidence rose 15 points in the third quarter to 49, rebounding from a 26-point drop in the second quarter, the largest quarter-over-quarter decline since The Conference Board’s survey began in 1976. (See Figure 6.) Although the recent uptick is encouraging, the measure remains below 50, indicating that negative sentiments still outweigh positive ones.
Small businesses appear to have a slightly more positive outlook. The National Federation of Independent Business (NFIB) Small Business Optimism Index rose to 100.8 in August, as respondents reported improvements in their overall business health. (See Figure 7.) Small businesses, however, expressed concern about the labor market and their ability to fill open positions. In addition, while the NFIB’s Uncertainty Index fell four points in August to 93, the organization noted that this was the 11th-worst reading in 51 years.
“Optimism increased slightly in August with more owners reporting stronger sales expectations and improved earnings,” said NFIB Chief Economist Bill Dunkelberg. “While owners have cited an improvement in overall business health, labor quality remained the top issue on Main Street.”
Despite these recent improvements, financial stress remains evident across the broader corporate landscape. In the first six months of 2025, 371 companies filed for bankruptcy, the most first-half bankruptcy filings since 2010, in the wake of the Great Recession, according to S&P Global Market Intelligence. (See Figure 8.) The data includes companies with public debt and assets or liabilities of at least $2 million and private companies with assets or liabilities of at least $10 million at the time of filing, S&P said.
Economic signposts
Three major economic indicators tend to shape consumers’ and businesses’ views about the economy: inflation, unemployment, and interest rates. Inflation and unemployment, in particular, heavily influence the Fed’s decision-making regarding interest rates.
Inflation
Significant progress has been made since “headline” inflation — the topline Consumer Price Index (CPI) figure reported monthly by the U.S. Bureau of Labor Statistics (BLS) — and core inflation — a measure that excludes volatile food and energy costs — peaked in 2022. Still, in August, headline inflation rose 2.9% from the previous year, up from 2.7% in July and the quickest pace since January. (See Figure 9.) Core inflation rose 3.1% year over year in August, unchanged from July.
While core inflation has been stable of late, the uptick in headline inflation in August may raise new concerns about broader inflationary momentum. This puts policymakers in a bind: While inflation is not accelerating dramatically, it is trending in the wrong direction. And there is growing concern that we have yet to see the full impacts of tariffs.
One lingering question is whether tariffs implemented by the U.S. this year are truly an economic bargaining tool or an all-purpose lever for broader geopolitical strategy. The latter is particularly troubling in its potential to introduce greater uncertainty and unanticipated economic consequences.
Unemployment
The job market in 2025 has frequently been characterized as “no hire, no fire.” But evidence is mounting that this label may no longer be accurate and that labor market momentum may be slowing more than initially thought. This adds to the Fed’s challenges.
In August, the unemployment rate rose slightly, to 4.3%, up from 4.2% in July and 4.1% in June, according to the BLS. (See Figure 10.) Employers added 22,000 nonfarm jobs in August.
In recent months, the BLS has repeatedly revised previous job figures, mostly showing more negative results than initially reported. Originally, the BLS reported gains of 139,000 jobs in May and 147,000 in June; the latest numbers show job gains of just 19,000 in May and losses of 13,000 jobs in June. Perhaps more troubling, the BLS on Sept. 9 said that employers added 911,000 fewer jobs for the year ending March 2025 than previously reported. (On a slightly more positive note, July figures were revised up from 73,000 to 79,000.)
“While the annual BLS jobs data revisions were widely anticipated, the depth of the adjustment was at the harsher end of expectations and comes at a moment when employment is more central to the [Federal Open Market Committee] policy path forward,” UBS said in a Sept. 10 briefing. “Combined with the most recent nonfarm payrolls report showing a modest gain of just 22,000 jobs in August, the revisions add to evidence of a more gradual deterioration in employment conditions spanning a more extended period, rather than an abrupt change.”
Some analysts have speculated that the picture may be even worse than it appears, as slowing immigration and rising deportations have tightened the labor supply, helping employers minimize layoffs. On the other hand, the revisions published by the BLS in September are only preliminary; final figures will be published in February 2026. Notably, in September 2024, the BLS revised down initial job gains for the year ending March 2024 by 818,000, but final figures released in February 2025 showed an adjustment of just 598,000. Some economists believe a similar correction is in store this year.
Other recent reports signal potential trouble ahead:
of chief human resources officers surveyed by The Conference Board throughout the second quarter said they expected their companies to slow hiring over the next six months. That’s up from 11% who expected hiring to slow when surveyed a year earlier.
Nonfarm job openings fell to 7.18 million in July, according to the BLS. This is just the second time job openings have fallen below 7.2 million since the end of 2020.
Initial unemployment insurance claims rose to 264,000 for the week ending Sept. 6, according to the Department of Labor. That’s the most initial jobless claims since October 2021.
(Also complicating matters: Following the release of July jobs data, President Trump fired BLS Commissioner Erika McEntarfer. This has already raised questions from some economic observers — including the American Enterprise Institute and National Association for Business Economics — about the accuracy and reliability of BLS jobs and inflation data going forward.)
Interest rates
Following its Sept. 17-18 meeting, the Federal Open Market Committee announced a one-quarter percentage point cut to the federal funds target rate — lowering rates to 4.0% to 4.25% — the first rate cut since December. The Fed also indicated that additional rate cuts may be possible in the near future.
“My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people,” Federal Reserve Chair Powell said in a press conference announcing the rate cut. “While the unemployment rate remains low, it has edged up, job gains have slowed, and downside risks to employment have risen. At the same time, inflation has risen recently, and remains somewhat elevated. …
“Changes to government policies continue to evolve, and their effects on the economy remain uncertain,” Powell continued. “Higher tariffs have begun to push up prices in some categories of goods, but their overall effects on economic activity and inflation remain to be seen. A reasonable base case is that the effects on inflation will be relatively short-lived — a one-time shift in the price level. But it is also possible that the inflationary effects could instead be more persistent, and that is a risk to be assessed and managed. Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem.
"In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside — a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. …
“With today’s decision, we remain well positioned to respond in a timely way to potential economic developments. We will continue to determine the appropriate stance of monetary policy based on the incoming data, the evolving outlook, and the balance of risks.”
One upside for the economy: The new tariffs are expected to generate substantial revenue for the U.S. government. This should help to partially offset the impact of the sweeping spending and tax bill President Trump signed into law in July.
But the bottom line is that many important questions about the short- and long-term economic outlook remain unanswered.
Have the full effects of tariffs kicked in yet?
Will hiring continue to slow?
Will businesses continue to cut back on spending and investments?
What actions will the Fed take on interest rates later this year and next?
While we await potential answers, the sense of uncertainty that has clouded the economic outlook for several quarters is likely to persist.
