The U.S. economy is set for a modest deceleration in the second half of 2025, with consumer spending cooling and trade policy uncertainty weighing on growth, according to Morningstar Investment Management.
Morningstar expects real GDP growth to slow by roughly 1.5 percentage points over the next two years. Contributing factors include a weakened savings buffer and the recent wave of tariffs.
The slowdown was already forming before the tariff hikes in April. We had been tracking a gradual pullback in consumer activity, which aligns with the drop in the household savings rate below pre-pandemic levels.
Preston Caldwell, Morningstar’s chief U.S. economist
Despite current headwinds, Caldwell sees growth picking up between 2027 and 2029. As the inflationary effects of tariffs ease and the Federal Reserve moves toward a more accommodative stance, he anticipates a rebound in economic momentum.
Inflation, meanwhile, is close to aligning with the Fed’s 2% target. However, Caldwell warns that price levels may rise in the near term due to tariffs, with the inflationary impact likely peaking in 2026.
Morningstar expects the resulting economic slack to help temper inflation afterward.
Caldwell also addressed concerns about how slower GDP growth might affect equity markets. He cautioned against assuming a direct link between GDP softness and market performance.
Historical patterns show that market selloffs don’t always coincide with deep recessions. The 2001 downturn led to a major selloff despite a relatively shallow economic contraction, while some sharper slowdowns haven’t caused major equity losses.
“Spending has remained strong, but we believe many households are approaching a limit,” he added,” Caldwell add.
He forecasts the Fed will cut short-term interest rates by 200 basis points over the next 30 months. “Rates could rise again briefly, but structurally, they’ll have to come down—especially for housing,” Caldwell said. Buyers are losing patience with the idea of taking on expensive mortgages now and refinancing later.
The U.S. economy in the second half of 2025 is entering a phase of moderated growth. After a period of strong consumer activity, signs are emerging that households are starting to cut back.
This slowdown isn’t unexpected—economists had been tracking a decline in the household savings rate and warning that spending at elevated levels was unsustainable.
Bloomberg’s latest outlook paints a more subdued trajectory for the U.S. economy in the second half of 2025. Real GDP contracted by 0.2% at the start of the year, weighed down by weakening consumer spending and sharper-than-expected trade effects. That decline followed a brief uptick revised lower from earlier estimates.
Economists surveyed by Bloomberg have downgraded the full‑year growth forecast to around 2% for 2025, down from prior projections of 2.3%.
The combination of tariff-related costs and stretched household budgets has driven most of the downturn in spending and investment decisions. Consumer sentiment has shifted noticeably—after robust post‑pandemic gains, spending growth has plateaued, even slipping in import data and monthly retail indicators.
Trade policy uncertainty plays a central role in the caution, with tariffs continuing to filter into prices.
Bloomberg Economics estimates that tariff pass-through to consumer goods remains modest so far, but it expects upward pressure on inflation to build, peaking sometime in 2026 before gradually easing as growth cools and supply pressures soften.
Financial markets remain wary. Forecasts suggest the Federal Reserve may delay rate cuts until broader weakness emerges.
While some countries are cutting rates in response to global economic softening, the Fed is projected to hold the benchmark rate steady near 4.25% through year-end.
Bloomberg sees the U.S. economy navigating a gentle slowdown through the rest of 2025 as tariffs bite and households adjust to tighter budgets.
Inflation may surprise on the upside before relenting, and monetary policy will stay restrictive until clear signs of weakness materialize.
