Notes on the Economy – Q3 2025 Summary

TARIFF FRONT-RUNNING DOMINATES DATA

The 2025 second quarter’s advance estimate for U.S. real GDP shows annualized growth of 3.0%. That follows a first quarter annualized decline of 0.5%. Final demand has been more erratic than production. After an annualized drop of 3.1% in the first quarter of 2025, real final sales advanced 6.3% in the second quarter. Growth figures have been dominated and distorted by swings in imports, which advanced an annualized 37.9% in the first quarter of 2025 only to fall an annualized 35.3% in the second quarter. Real GDP counts domestic, not foreign, production. So, GDP was suppressed in the first quarter and boosted in the second quarter when a material portion of each quarter’s consumption and investment was shifted between domestic and foreign production.

The swing in imports occurred as domestic purchasers bumped up purchases of foreign products in the first quarter. They did so with the intention of buying in advance of current requirements in order to front-run the imposition of tariff increases. A sizeable portion of the first quarter’s imports then went into inventories. That permitted a large drawdown of foreign-produced goods out of inventories in the second quarter, which reduced the need for imports.

Uncertainty about U.S. tariff proposals has adversely affected global economic growth for 2025. However, as more trade deals have been struck and tariff proposals moderated, global economic growth momentum has started to improve. The global Composite Purchasing Managers’ Index (PMI), for example, reached 52.4 in July, safely above its economic expansion /contraction threshold of 50.0.

HEADLINES – WHAT’S IMPORTANT

1. Inflation Remains a Problem – The impact of tariffs has only just started to emerge. Tariffs will push inflation higher in the second half of the year, with annual core Personal Consumption Expenditure (PCE) inflation likely to climb above 3.0%.
2. The Federal Reserve’s (Fed’s) Rate-Cutting Will Resume by the End of the Year – The most likely course of events is for the Fed to start cuts in 2025 at a pace of 25 basis points (bps) at a time until rates eventually reach their neutral level at around 3.0-3.5% by the middle of 2026.
3. The S&P 500 Has Recovered From a Non-Recession Bear Market – However, slow economic and profits growth is likely in the near term; investors should consider maintaining global diversification with a focus on U.S. domestic small- and mid-caps and foreign developed markets.
4. Weak Crude Oil Prices Are an Opportunity – Crude oil pricing is weak, as production increases are currently outpacing growth of demand. Yet chronic underinvestment in new production projects foreshadows the emergence of supply constraints in late 2026 or early 2027. Acquisition of existing production could provide an attractive investment.

LOOKING AHEAD

The process by which the Trump administration has chosen to determine, propose, and negotiate tariff increases has created considerable economic policy uncertainty. However, tariff front-running appears to be over, for now, as monthly imports slipped below pre-surge levels during April through June. While some of the trade-and inventory-related distortions may linger, the bulk of the impact has passed. Exports, imports, and inventories should be fully rebalanced by early 2026.

Economic policy is tilting toward a more pro-growth agenda. The administration has set out to actively reduce the regulatory burdens on business. Fed policymakers have become acutely aware of deteriorating demand for labor and are now poised to counter weakness in the labor market. In spite of tariffs, fiscal policy is expansionary with the passage of the One Big Beautiful Bill Act (OBBBA). The positive growth impact of OBBBA’s tax relief measures and its boost to security expenditures exceeds the negative influence of its spending restraints.

Global economic growth is set to slow down, but somewhat less than anticipated a few months ago, as the intensity and frequency of U.S. tariff demands have moderated. The International Monetary Fund’s (IMF) July update to its World Economic Outlook, projects global GDP growth to decrease from 3.3% in 2024 to 3.0% in 2025 and 3.1% in 2026. The forecast growth rates are 0.2 and 0.1 percentage points higher than in the April forecast. The IMF’s growth outlook improved for nearly all countries, but in most cases growth is still projected to be slower than in 2024.

*The information contained within this edition of the Notes on the Economy Executive Summary is based on data released as of August 25, 2025. 

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