Slow, steady and resilient—but challenges persist

The final quarter of 2025 may mark a turning point for the U.S. economy. That's not to say the economy will be back to full strength-far from it. However, the fog of uncertainty that weighed on growth in the first half of the year is starting to lift, revealing a clearer view of what lies ahead.

Some clouds are parting
The first half of the year was marked by a series of challenges that collectively slowed economic momentum. For instance, early in the year, there was a wave of tariff announcements, which created a great deal of confusion and resulted in financial market turbulence. Consumers and investors didn't know what prices to expect, and CEOs were scrambling to figure out where to source goods and locate production. That kind of uncertainty causes hesitation-and hesitation slows growth.

Meanwhile, companies rushed to get goods into the country ahead of the tariffs, trying to avoid higher costs. That distorted normal supply chains and pulled forward demand, which isn't sustainable and contributed to the drag down on GDP, particularly in the first quarter, when gross domestic product (GDP) declined to -0.6%.

Clarity resulting in tailwinds
Nevertheless, even with the continued weakness in the labor market, the environment is becoming more constructive to economic growth. For starters, policy clarity is improving. The tariffs are in place, so business leaders now have a clearer picture of where they're going to source goods and locate production. That clarity is important; it allows businesses to move from reactive to proactive, and that shift will likely support corporate investment and hiring.

We've also gained some clarity in international markets' response to U.S. tariffs from both a monetary and fiscal policy standpoint. As a result, equity market performance has broadened out to include international equities-and that is likely to continue. That broadening is happening concurrently with an overall strong rebound in financial markets. Interest rates are starting to come down, and equity markets are hovering near all-time highs. That's a positive backdrop for growth, as it boosts consumer confidence and creates wealth effects-that is, consumers might spend more because they perceive themselves to be wealthier due to factors such as rising retirement accounts and home values.

Another quiet but important tailwind is the weaker dollar, which helps U.S. exporters and U.S. investors making investments abroad. So far this year, developed international equity outperformed in the first quarter, followed by a rebound in mega-cap technology stocks in the second, and then a rally in Asian equities in the third quarter. This downward pressure on the U.S. dollar will likely continue, which will make international investments more attractive to U.S. investors.

However, it's also important to keep in mind that a weaker dollar makes U.S. imports more expensive. Even with the recent efforts to encourage American manufacturing, the U.S. continues to import many goods such as electronics, cars and energy, so higher import prices would negatively impact both consumers and businesses. And so, the weaker dollar is both positive and negative in that regard.

Additionally, some of the tax changes from the "One Big Beautiful Bill Act" (OBBA) are supportive of economic growth. For instance, allowing workers in traditionally tipped occupations to deduct up to $25,000 in qualifying tips from their federal taxable income puts more disposable income in the pockets of these consumers. Plus, corporate tax changes, such as the allowance of 100% bonus depreciation for qualified property acquired by businesses and placed in service after Jan. 19, 2025, can improve businesses' cash flows.

The worst of it may be behind us
That said, we’re not out of the woods yet.

The labor market remains tight. The supply of workers is still constrained, and that's not going to change overnight. It's a structural issue, and it's going to keep pressure on growth.

The demand for labor is weaker, as businesses are hesitant to add employees in case the economy slows further. Due to this hesitancy, job growth has slowed, and that's keeping consumer spending on the cautious side. That's going to cap how strong GDP can be.

Inflation isn't going away just yet and probably won't fall significantly during the quarter. Tariffs are still filtering through to goods prices, and that's going to keep costs elevated. This lingering inflation could complicate the Federal Reserve's rate-cutting strategy and keep long-term interest rates elevated.

However, one of the more encouraging developments is the shift in market sentiment. Earlier in the year, the combination of policy uncertainty and financial market volatility created a real drag on confidence. Now, with key announcements behind us, there's a sense of stabilization. With more clarity on sourcing and supply chains, CEOs can move business planning forward.

Moreover, even though the Fed remains cautious of a second wave of inflation, they have started to cut rates, which should help ease financial conditions. While these cuts are already priced into financial markets, they still provide support for riskier assets. Stocks have rebounded, and bond yields-especially on the short end-are starting to reflect an outlook for a lower-rate environment. That's good news for sectors like housing, financial stocks and smaller company stocks, all of which tend to benefit from lower rates and a steepening yield curve.

Putting it all together, GDP growth will probably be below 2% for the fourth quarter, when adjusted for inflation. That's better than the growth in the first half of the year, but still historically below trend. The good news, however, is we're not in recession. We've just slowed down-and I think the worst of the uncertainty is behind us.