Key Highlights:

• US economy remains resilient with 3%+ Q2 growth and markets recovering, but risks are rising.
• Labour shortages, tariffs, and policy uncertainty could slow growth and hurt corporate profitability.
• Projected 2026 GDP cut to 1.5%, with gradual Fed rate cuts expected amid persistent inflation.

Despite ongoing global disruptions—geopolitical conflicts in the Middle East, tariff volatility, and restrictive immigration measures—the US economy and markets have shown resilience. The Atlanta Fed’s Nowcast projects Q2 2025 GDP growth above 3%, placing first-half growth at around 1.5%+, after a weak Q1. Markets have rebounded from tariff-related losses, with Nasdaq and S&P500 in positive territory year-to-date.

While fears of stagflation and uncertainty are easing, risks remain. Potential oil shocks, inflation from tariffs, and uncertain fiscal developments (for example, the proposed tax cuts) could reverse improving sentiment. The proposed tax cuts, likely benefiting the wealthy, might still support consumption modestly.

However, multiple risks temper optimism:

1. Labour shortages due to immigration crackdowns, especially impacting sectors like farming and construction.
2. Public sector job cuts, partly linked to political shifts, weaken payroll data.
3. Rising federal spending driven by interest payments, defence, and entitlements, despite cuts elsewhere, keeps fiscal pressure high.

Looking ahead, the authors forecast economic slowdown driven by:

• Labour supply constraints,
• Higher production costs from labour shortages and tariffs, and
• Weaker non-AI investment amid policy uncertainty.

While legal blue-collar wages may rise, white-collar job prospects are deteriorating. As a result, 2026 GDP growth is downgraded to 1.5%, indicating below-trend but non-recessionary growth. The Fed is expected to cut rates by 50bps this year and 50bps more next year, balancing moderate growth with lingering inflation.

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