The US economy is slowing down, a fact that is now evident in ‘hard’ data according to Fitch ratings’ latest Global Economic Outlook report. “The US economy is slowing down. Our growth forecasts for both 2025 and 2026 are broadly unchanged from the June GEO at 1.6%, but this represents a sharp deceleration from 2.8% in 2024,” Fitch says in its latest report.The US economy showed a 0.8% expansion (non-annualised) in 2Q25, surpassing Fitch’s June forecast of 0.4%, primarily due to reduced imports. However, the GDP fluctuations caused by Donald Trump administration’s tariff-related factors mask the actual economic deceleration, cautions Fitch.“Greater clarity about US tariff hikes does not alter the fact that they are huge and will reduce global growth. And evidence of a slowdown in the US is now appearing in the hard data; it’s no longer just in the sentiment surveys,” said Brian Coulton, Chief Economist at Fitch.Also Read | Strong domestic demand: Fitch revises India’s GDP growth outlook upwards to 6.9%; expects another RBI rate cut this year
- The final domestic sales figures (GDP without net trade and inventories) decreased to 1.6% annualised, down from the 2.5%-3.0% levels observed in 2023 and 2024.
- Consumer spending growth declined to 1.6% annualised in 1H25, compared to 3% during 2023 and 2024.
- Services expenditure has significantly decreased due to weakened consumer confidence and increased household savings.
- Government expenditure on goods and services, which contributed 0.6pp to yearly GDP growth in both 2023 and 2024, has now reached a plateau.
- Private investment patterns have shown variation, with equipment investment showing substantial growth, driven by increased AI-related capital expenditure, whilst investment in commercial and residential properties has decreased.
- However, elevated long-term interest rates continue to affect property investment, and considering the heightened policy uncertainty, the overall investment outlook remains modest.
- The employment landscape shows signs of slowing. The average monthly increase in payrolls reached only 29,000 during the three months leading to August, marking the lowest level since 2010 (barring the pandemic period). This trend reflects both diminishing labour availability and demand, particularly as restricted immigration policies affect population expansion.
- Despite maintaining low unemployment figures, the combination of reduced job creation, steady wage moderation and increasing inflation will negatively impact overall real household earnings, and Fitch anticipates further reduction in consumption during the second half of 2025.
Additional tax reductions included in the One Big Beautiful Bill Act are expected to expand the fiscal deficit, which should bolster demand in the coming year. From early 2026, Fitch expects quarterly GDP growth to improve, although the yearly average growth is projected to remain steady at 1.6%. Recent months have shown a slight increase in core inflation, with tariffs having a minimal impact on prices.“We anticipate a stronger pass-through in the rest of the year as pre-tariff imported inventories are depleted and more firms acknowledge that tariff hikes are here to stay. Nevertheless, we have lowered our end-year CPI forecast to 3.6% from 3.8% in the June GEO,” says Fitch.Also Read | ‘Modi’s war’? How US, EU are ‘fuelling’, funding Russia-Ukraine conflict“Pass-through from the huge jump in the average effective tariff rate to US CPI inflation has been modest so far, with some evidence in the national accounts that it has partly been offset by downward pressure on corporate profits. But we expect pass-through to accelerate later this year,” it adds.The rise in inflation is expected to reduce real wage increases and affect US consumer expenditure, which has already demonstrated significant slowdown in 2025. Employment expansion has significantly reduced, partially due to immigration restrictions affecting workforce growth. Despite anticipated support from an expanding fiscal deficit in 2026, Fitch projects that the US annual average GDP growth will remain at a subdued 1.6%, considerably lower than the typical trend.The softening in the labour market will make the Fed more willing to ease policy and we now anticipate 25bp of rate cuts at both the September and December FOMC meetings and three further rate reductions in 2026, it concludes.
