Economic momentum shifted toward a more measured expansion against a backdrop of widespread uncertainty. The first quarter saw the U.S. economy decline at an annualized pace of 0.5%; however, this was primarily due to a sharp increase in imports – a negative contributor to GDP – as companies stockpiled inventory ahead of tariffs. Despite this being the first contraction in three years, key indicators remained intact. The labor market and consumer spending continued to prove resilient, though recent data suggest a potential softening. The second quarter was then marked by tariffs announced on April 2nd, a temporary pause and subsequent movement on trade deals, tax bill negotiations, and intensifying geopolitical risks. As such, we expect this trend of cautious growth to continue at least until there is further clarity in trade and the federal budget.
Much will depend on how economic activity fares amid an ever-changing trade policy environment. Shifting tariff dynamics have led to a slowdown in corporate investment and hiring as businesses are forced to navigate unknown future costs and prices. So far, the labor market remained strong with unemployment staying within a tight range of 4.0% – 4.2%. The Labor Department reported the U.S. added 147,000 in June, a figure that came in above expectations, while also revising April and May’s initial figures higher. While there have been signs in recent months of a potential and gradual slowdown, the chief economist at ADP was quick to note any “slowdown in hiring has yet to disrupt pay growth.”* A resilient labor market will be key to continued economic stability.
Consumer spending will be another important indicator to watch, especially as delayed tariff effects begin to unfold. To date, spending has remained stable, especially as wage growth continues to outpace inflation. According to the Bureau of Economic Analysis, wage growth has steadily increased by about 3.8% on an annualized basis since January, 2025. Maintaining wage growth will be critical as consumer spending accounts for approximately two-thirds of US GDP. With that said, recent reports have shown signs of a more cautious consumer. Real spending, which factors in inflation, slid 0.3% in May. Consumer confidence, as measured by the Conference Board, also declined in June, signaling heightened unease around tariffs and their potential inflationary impact. This apprehension is apparent in the housing market where new home sales in May declined and sellers outnumber buyers by 500,000 – the largest gap since 2013.
Much like the consumer, the Federal Reserve is keeping a close eye on the tariffs’ impact on inflation. On June 18th, the Federal Open Market Committee (“FOMC”) voted to hold interest rates steady at the target range of 4.25% – 4.50%. While testifying in Congress, Federal Reserve Chair Jerome Powell noted that current economic data would typically justify further rate cuts were it not for their concerns about the inflationary effects of higher tariffs. Some FOMC members have joined the Trump administration in vocally supporting a July rate cut, although economists still point to September as the more likely timeframe for a rate cut.
Setting aside the humanitarian tragedies of war, the escalating conflict in the Middle East presents a significant risk of disrupting global supply chains. While markets largely brushed aside the US military’s attack on Iranian nuclear facilities, how Iran responds will directly impact energy markets and possibly energy infrastructure. The country controls the Strait of Hormuz, through which approximately 20% of the world’s oil passes. Closing the Strait would likely cause a spike in oil prices and market volatility, as the action would be viewed as a significant escalation. The Iranian Parliament initially voted to close the Strait, but then the Trump administration reportedly loosened certain sanctions to allow for China to continue buying Iranian oil.
Back in Washington, lawmakers hope to finalize a tax proposal that may bring a tailwind to the economy. At the time of this writing, the House is looking to vote on the Senate-passed their version of the One Big Beautiful Bill Act (“OBBBA”). Notable corporate provisions in the bill, such as bonus depreciation and R&D deductions, might help offset some of the tariffs’ adverse impact on businesses.
*Source: Automatic Data Processing, Inc. (“ADP””) ADP National Employment Report
