Under the hood of America’s twin economic motors

The US’s exceptional economic growth of the past two years was driven by the twin engines of consumer and corporate spending. With unemployment still low and real wages still rising, consumers continue to spend, but business expenditure is starting to stall in the face of the Trump administration’s policy making. We have broken down the impacts of policy on the US economy to revise our forecasts.

In 2022 and 2023, the US economy posted robust growth in its gross domestic product (GDP) of respectively 2.9% and 2.8%, fuelled by consumer spending and businesses’ capital expenditure (capex). After two years of exceptional economic expansion, growth is now slowing as the unpredictable US tariffs dent consumer confidence and push businesses to postpone capex decisions.

For now, the slowdown is mostly reflected in sentiment surveys rather than hard data. However, the Trump administration’s policy initiatives are already clear enough for us to review our economic forecasts. Compared with the start of 2025 when we expected US growth to reach 2.4% this year, we now see the economy expanding by 1.8%. That would represent growth that is slightly below the US economy’s potential, but suggests that at this stage we see still limited risk of the country falling into recession. At the same time, due to the impact of tariffs, we see the disinflationary process stalling in 2025 with core Personal Consumption Expenditure (PCE) – the preferred inflation measure of the Fed - averaging 2.7%.

At this stage we see still limited risk of the country falling into recession

Breaking down GDP’s components

Our growth forecast is based on modelling each component of US GDP. First, consumer spending, which accounts for almost 70% of US GDP, should contribute around 1.9 percentage points to US growth in 2025.

There is strong evidence that heightened uncertainty decreases consumption. With the exception of the start of the Covid pandemic five years ago, US policy uncertainty is now at an all-time high (see chart 1). Such ambiguity will act as a drag on consumption in the first and possibly second quarters of 2025. However, as the policies of the Trump administration become clearer in the next few months, we expect this uncertainty impact to subside over the rest of the year.

Moreover, other elements of the US administration’s agenda should have a positive impact on the economy, putting a floor under consumer spending. The budget blueprint rolls over existing tax cuts that were first implemented in 2017. We forecast the effect on consumption will be quantitatively small, as this policy change is widely anticipated, but it should still help avoid a major slowing in 2025.

Furthermore, if treated in a transactional way by the Trump administration in order to negotiate concessions, as in our base case (see chart 2), the impact of tariffs on inflation should be modest and transitory (see chart 3). The temporary stalling of the disinflationary trend due to tariffs would not then be enough to significantly reduce the real income of US households.

This temporary stall in deflation… would not be enough to significantly reduce US households’ real income

Small business confidence, government spending and exports

The second engine of US growth is capex, which accounted for almost 19% of US GDP in 2024 and we expect it to contribute around 0.2 percentage points to GDP growth in 2025, which is less than previous years. In February, an index from the National Federation of Independent Business (NFIB) showed a decline in confidence. We expect a meaningful decline in capex and inventories in the first quarters of this year, especially for small and medium enterprises. Over the rest of the 2025, some of this postponed capex may catch up, in part thanks to the Trump administration’s efforts to incentivise foreign investment into the US and a potential push towards deregulation in some sectors. 

The final contributors to GDP are government spending and net exports. The US’s budget blueprint focuses on extending tax cuts, which would show up in GDP data through higher consumption, rather than new government spending. Given the current high-profile efforts to finance part of these tax cuts through cuts to other government programmes, including potential savings by the Department of Government Efficiency or DOGE, GDP growth from government spending should be slightly negative, and we expect it to subtract -0.1 percentage points in 2025.

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From net exports, we also expect a negative contribution of -0.2 percentage points of GDP. There is already evidence that imports have risen strongly in the first months of the year in anticipation of tariffs. This effect can continue for a few months as firms bring forward their orders. In the second half of 2025, we see this trend reversing. Overall, we expect US imports to meaningfully decline on a year-on-year basis only starting in 2026, as the trade flows will take time to be rerouted.

Risks to our scenario

Our growth outlook depends on the uncertainty surrounding today’s policies fading over the next few months: specifically, the Trump administration adopting a transactional approach to tariffs, as well as delivering on other parts of his agenda that are more beneficial for economic growth. In this context, we see the Federal Reserve cutting its interest rates twice in 2025, limiting risks to growth, helped by this modest and transitory impact of tariffs on inflation (see again chart 3).

Our growth outlook depends on the uncertainty surrounding today’s policies fading over the next few months

On the other hand, should policy uncertainty continue for most of the year, or should US tariffs spiral into a global trade war, we would expect core inflation to rise significantly, and estimate that it may reach 3.5% towards the year end. This would be enough to erode the real income gains of most US households. What is more, in this scenario most businesses would aggressively slash capex, starting a feedback loop that would push some sectors to cut jobs, which in turn would affect the consumption engine and lead to a recession.

In this ‘stagflation’ scenario of stagnating demand, leading the unemployment rate to exceed 5% plus temporarily high inflation, we would expect the Fed to prioritise its labour market mandate and cut rates towards 2%. That would be below the ‘neutral’ level at which interest rates neither stimulate nor stall the economy, but still higher than the zero lower bound, given the trade war’s inflationary impact. We see this risk as having about a 20% probability at this stage.