The US economy enters the second half of 2025 on increasingly shaky ground. After defying multiple global pressures to start the year — including tariffs, geopolitical unrest, and inflation — new data confirms that momentum is fading fast. The latest GDP revision shows the US economy contracted by 0.5% in Q1, marking its first decline in three years. Consumers are pulling back, unemployment claims are rising, and major fiscal and trade policy deadlines are approaching fast.
First contraction in years confirms slowdown
Revised data released this week showed that US GDP shrank at an annualized rate of 0.5% in Q1 2025, steeper than the initial estimate of -0.2%. The downward revision was attributed to weaker consumer spending and declining exports — two critical pillars of the economy.
That contraction ends a streak of consistent growth that lasted since early 2022. It follows a 2.4% expansion in Q4 2024, underscoring just how abrupt the slowdown has been. Federal Reserve officials have been clear: no interest rate cuts will come until the economic outlook stabilizes, despite growing calls for relief from consumers and businesses.
Tariff deadline, debt ceiling and ceasefire fragility add to risk
A trio of major developments could upend what little economic stability remains:
- Tariff resumption deadline (July 9): President Trump’s 90-day “pause” on retaliatory tariffs expires soon. Dozens of US trading partners — including Canada, the EU, and India — must strike new deals or face higher import taxes.
- Debt ceiling (X-date in August): Treasury Secretary Scott Bessent warned that the US could default on its debt obligations by August unless Congress raises the borrowing limit. A default would be historically unprecedented and globally disruptive.
- Middle East ceasefire: The fragile peace between Iran and Israel, brokered in June, could collapse quickly. Any renewed conflict would likely drive up oil prices just as inflation begins to reaccelerate.
Inflation risks rising again
Despite holding steady earlier in the year, inflation is poised to reappear in the second half of 2025. Oxford Economics warns of a lag effect from tariffs, which may push prices higher in the coming months. “There’s a lag between changes in tariffs and when they show up in prices you and I are paying,” said chief economist Ryan Sweet.
With a surge in oil prices possible if Middle East tensions return, American consumers could feel a double squeeze from higher fuel costs and everyday goods becoming more expensive due to trade policies.
Labor market softens as spending cools
While the headline unemployment rate remains near historic lows, new cracks are forming:
- Continuing jobless claims have hit a four-year high
- Wage growth is slowing
- Consumer spending is declining as confidence wavers
Federal Reserve Chair Jerome Powell said the central bank is holding off on rate cuts to see how these trends evolve. Economists expect the Fed’s next move could come in September if further evidence of economic erosion mounts.
Markets remain resilient — for now
Despite mounting economic headwinds, stock markets have largely brushed off concerns. The S&P 500 and Nasdaq closed last week at record highs, buoyed by tech stocks and optimism around potential tax cuts. Global markets also held up well in the first half of 2025, with the MSCI World Index rising 8% and the S&P 500 up 5% year-to-date.
Still, analysts caution that this resilience may not last. The looming X-date, tariff decisions, and Fed policy shifts could all trigger volatility in the coming weeks.
What’s next for the US economy?
The outlook for the US economy is growing more uncertain by the day. Policymakers face competing pressures to tame inflation, support growth, and manage an increasingly volatile global landscape. With critical deadlines in July and August, the next 60 days could prove pivotal.
Investors, consumers, and lawmakers alike are watching closely — because the calm we’ve seen so far may not last.