As 2025 began, the US economy appeared to be on solid footing. Growth was expected to continue at just above 2 per cent, with core inflation slowly returning towards the Federal Reserve’s 2 per cent target.
However, it’s now evident that the US economy has dropped into a lower gear. Extreme tariff policies, federal spending cuts and immigration could push the US economy into a recession—even as the inflationary impact of tariffs looms and Congress prepares to deliver a new set of tax cuts in 2026.
The Fed’s policy deliberations this week (March 19-20) will provide important insight into its economic outlook. The Summary of Economic Projections (SEP) and corresponding dot plots will offer forecasts for real GDP growth, the unemployment rate, inflation, and the federal funds rate. (The expected path for the federal funds rate is typically shown in dot plots, where each voting member indicates their projected rate at the end of each year for the next few years. These projections reflect the Fed’s expectations for interest rates based on its economic outlook.)
Currently, the Atlanta Fed’s GDPNow model projects an annualized 2.4 per cent contraction in real GDP for the first quarter. This decline has been driven by January’s unusual international trade data, likely a result of US businesses stockpiling products that could be hit by tariffs, as well as a surge in gold imports.
Even after adjusting for these trade flows, growth remains weak. Looking at other sectors, consumer spending—a major driver of the US economy—shows signs of slowdown. Real consumer spending is tracking below a 1 per cent gain in the first quarter, after growing at nearly 4 per cent in the second half of 2024. Light vehicle sales have dropped from an annualized 16.5 million units in Q4 2024 to 15.7 million units over January and February. Other areas of consumer spending are showing signs of softness.
Consumer confidence, as measured by the Conference Board and the University of Michigan, declined in both January and February. The Michigan index fell to its lowest level in three years in early March.
Business fixed investment typically occurs months after the decision to invest is made. While capital spending should remain stable for now, we expect real business fixed investment to decline this year.
Inventories will likely decrease as businesses have tried to frontload imports ahead of tariffs. Additionally, government spending at the federal level will likely decline through 2025.
Even if there are no further changes to tariffs, immigration policies or government spending cuts, the impact on economic growth and inflation will take more than a few months to discern.
For the Federal Reserve, this uncertainty adds complexity in defining the path forward for interest rates. In December, the Fed anticipated two rate cuts in 2025, while the market is currently forecasting three. The dot plots will reveal where the Fed’s voting members stand.
Although the Fed aims to avoid political commentary, it will have to address the heightened uncertainty it faces. As a result, it may hold off on any rate moves at this meeting until the future direction of policy actions in Washington become more certain.
If the economy does tip into a recession, the market adjustment will likely be most pronounced in sectors that have seen strong gains in recent years, such as cryptocurrencies and mega-cap US equities. In this environment, maintaining a balanced portfolio across fixed income, equities, and alternative assets will be essential. Alternative investments can enhance diversification, reduce overall portfolio volatility, and offer potential returns that are less correlated with traditional markets—a key advantage during periods of economic uncertainty.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
The federal government recently announced an investment in 5,300 new homes in Ottawa, but a closer look reveals a different story. Over 70% of the units are existing ones being repaired, and new units won’t be ready for 3-5 years. This is just one example where the government’s reported progress toward its 2030 housing target doesn’t quite add up. Are we seeing real strides in closing the affordability gap, or just recycled plans?
Read more in our latest Housing Affordability Watch: The Affordable Housing Spin Cycle
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.
