How Badly Will Uncertainty Hurt US GDP Growth in 2025?

Steve Odland: Welcome to C-Suite Perspectives, a signature series by The Conference Board. I'm Steve Odland from The Conference Board and the host of this podcast series. And in today's conversation, we're going to talk about The Conference Board's outlook for the US economy. Joining me today is Yelena Shulyatyeva, the senior US economist for The Conference Board in our Economy, Strategy & Finance Center.  

Yelena, welcome to the program.  

Yelena Shulyatyeva:I'm so happy to be here.  

Steve Odland:So you've just issued this great revised forecast, and we have to tell our listeners, The Conference Board's been doing this for many decades, and we update our forecast roughly once a month. But you go into incredible detail, and we're not going to take everybody through every bit, every number in the whole thing, but we do want to share some of the top line in the forecast because there are some interesting changes to the forecast. 

Solet's just start with US GDP for 2025. What are you forecasting now?  

Yelena Shulyatyeva:So in short, we're expecting slower growth, high inflation, and a lot of headaches for the Fed.  

Steve Odland: That sounds terrible. Why did you do that?  

Yelena Shulyatyeva: Look at what happened recently, right? We had some implementation of tariffs, namely to Chinese imports. We also have a lot of uncertainty surrounding policy, and we have some developments in consumer sentiment and a little bit of a pullback in consumer spending in the beginning of the year.  

So all these major developments actually forced us to forecast GDP growth lower and quite significantly. Now we expect GDP growth this year to be at 2%. This is a downward revision from 2.3% previously estimated. And if you look at growth on a quarter-over-quarter basis that'svery interesting. We see that growth is slowing towards the end of the year. This is a trajectory of growth that we expect. If we look at growth as the way that the Fed looks at it, Q4 over Q4, it's even more dramatic. We revised down growth to 1.5% from previously estimated 2%.  

Steve Odland:Yeah. So the rate of growth slows each quarter, progressively through the year, and this is a result of not only the tariffs that have gone into. 

Yelena Shulyatyeva:It's a combination. You'retotally right. Tariffs is just one thing. So far, we have seen implementations on tariffs on China, and this is not even incorporating tariffs on Canada and Mexico, which have been postponed, but there's a tremendous right now that is really weighing on a lot of business decisions, whether it's to expand or to hire people. 

Steve Odland:Yeah. And we see this in our CEO confidence surveys, as well, and in all of our conversations with CEOs. They're just taking a wait-and-see attitude to try to figure out where things shake out. And so that plays into your forecast, because if everybody's holding back their investment then, of course, the numbers can't be as high as they would have been. 

Yelena Shulyatyeva:There's a policy, right? If there's some certainty about it, whether it's a growth impediment or it's a growth expansion, what is it? Just tell us what it is. Uncertainty is not particularly good for that.  

Steve Odland: No, CEOs just want to know the rules of the game so they can plan. But now, let's just take the possibility, as some people say, that this is just negotiation, and it's going to be relatively short term, and then there's going to be some reconciliation. Let's just say it happens in the next two to three months, and we have greater certainty. Is that in time to affect the growth numbers for the balance of the year, at that point?  

Yelena Shulyatyeva: I think the damage has already been done. I think we will see some weak numbers in the first quarter of this year. If you look at Atlanta Fed GDP tracker, it's negative. We expect positive growth in the first quarter because we think that we will see some contribution from accumulation of inventories ahead of those tariffs that everybody is talking about. 

But I think also the damage has been done, and this uncertainty, whether it persists or not, already did some damage to growth. 

Steve Odland: OK. So what I hear you saying is, even if this is relatively short term, and the policy certainty kind of resolves itself over the next quarter or so, it may not be enough to really affect the numbers beyond what you forecasted for this year because people don't turn on a dime and just start things up. And if they do, it's more long term.  

So this relatively pessimistic growth, even though it's early in the year, but this projection probably is pretty likely.  

Yelena Shulyatyeva: I think so, and it also depends what other uncertainties we may have to face going forward. There's a lot of geopolitical uncertainties, and there's other things, too. Uncertainty about taxes, uncertainty about other policies that we will need to discuss, probably, such as immigration policy and such.  

Steve Odland:Yeah, the tax bill is coming up, the immigration policy is in play. A lot of stuff going on, and it feels, I don't know if you agree, but it feels like it can only get worse from here depending on what happens, but it won't be enough to be a net positive from where you are. 

Yelena Shulyatyeva: It will not be enough to derail growth completely. I don't expect a recession, for example. That'sprobably not in the cards.  

And I think it's all about the labor market at the end of the day. If the labor market stays healthy, and consumers continue to derive income from the labor market, that will continue to support economic growth in the United States. After all, we are a consumer economy. We're not about exports or business investment in terms of defining GDP growth here.  

Steve Odland:Yeah. This is an important point. So 70% of our economy is from the consumer. There are other economies around the world that are dependent more on—  

Yelena Shulyatyeva: Much more dependent on those sectors. 

Steve Odland: —on the other sectors, and so therefore the consumer actually becomes the most important variable in this, right? And so consumer confidence, as we've talked about, is important, but also the level of debt, and the debt capacity that consumers have.  

Yelena Shulyatyeva:Yeah. So we have seen a little bit of a pickup in delinquency rates. Not probably a little bit, but quite a significant pickup. And this is more of a concern for consumers who have multiple types of debt, such as auto loans, other loans, student loans, et cetera. SoI think this is already limiting consumer spending growth to a certain extent. But on the other hand we do have much wealthier consumers who continue to drive consumption growth, based on the wealth effect and based on expectations and based on a lot of savings they have accumulated.  

Steve Odland: And your point, which is, they still have jobs, so you still have an income flow, even if you're living paycheck to paycheck, that paycheck is still coming because we have relatively historically low unemployment, And as long as they have the jobs and they have money coming in, they're able to keep this thing going to some extent, and hence, your 2% forecast for the year. 

But it's interesting. You don't have to go negative in this country in GDP in order to feel like it's in a recession. It seems like whenever it gets closer to 1%, it really feels like it hurts.  

 That's an excellent point. Once we get to 1% growth on GDP, this is very close to a stall speed in the economy. And what usually happens, once we hit that 1% mark, growth usually slows down much further. And this is a big risk. We don't want to slow down to 1% and then fall into a recession. That is what usually happens historically.  

We were talking about the labor market. You said it's key. Talk about your projections on unemployment and labor participation.  

Yelena Shulyatyeva: Our forecast is for the unemployment rate to rise to 4.4% by the year end.  

Steve Odland: Which still is not a bad number.  

Yelena Shulyatyeva:It's not the end of the world at all. But there are different forces driving the forecast. And as you mentioned, a big component of that is participation rate. Sowe'reprobably going to see some slowdown and/or decline in participation rate, simply because of immigration policies and aging of the population. So we have fewer and fewer people entering the labor force.  

On the other hand, we have a lot of job cuts, namely in the government sector. And while these people get laid off, they need to find another job, some of them do, and they will face quite a significant competition from the private sector, as well. So this will probably push the unemployment rate higher.  

Steve Odland:Yeah. And the job cuts, if you just look at the total in the government, are not as bad as they would appear because so many of them are retiring. Sothere's some natural occurrence here, but the bigger issue is the lack of immigration, of course. And those immigrants typically take the lower-paying jobs.  

So does that actually mean it could be wage inflation at the same time that you have this labor market loosening?  

Yelena Shulyatyeva: This is very difficult to estimate, actually. Yes, on the one hand the lack of lower-paid jobs may artificially push inflation higher, but at the same time, we have a much smaller economy. And those immigrants, they were getting paid and they were spending, pushing growth in consumption higher and, as a result, GDP growth higher. The higher the GDP growth, the higher is inflation. And it'svery difficult to estimate what offsets what, and to what extent. I'd say it's very uncertain what kind of impact it has on inflation. 

Steve Odland: OK, so then you've got the big S word. If we've got real slow growth, and we've got inflation continuing, do we get into a period of stagflation?  

Yelena Shulyatyeva:That's a scary word, indeed. The biggest word is something that the Fed will have to face this year, and that will be very difficult for them because they have a dual mandate. They have to monitor inflation and the labor market, and those two goals will be going in two different directions.  

So I think, at the end of the day, what will happen is that growth concerns will overwhelm inflationary pressures. So in other words, we will see a pickup in inflation almost immediately, probably going into the second quarter of this year. But after growth slows down significantly—as I mentioned, we will see growth slowing throughout the year—those concerns will overwhelm inflationary pressures, and inflation will slow down consequently.  

Steve Odland:So to be clear, you're not forecasting a period of stagflation because you're still forecasting 2% growth relatively, but you are forecasting—  

Yelena Shulyatyeva: There are some risks around it. I wouldn't call it stagflation, no, just for the record. But what I'm saying is that it's starting to look like one. 

Steve Odland: But you're also forecasting a little uptick in inflation, which is not what people had hoped would happen here. Because I think at the beginning of the year, and certainly the end of 2024, it looked like we were just seeing inflation tick down. It was slow, but it was ticking down, and there was hope of multiple cuts in the Fed funds rate this year.  

What are you projecting now from the Fed?  

Yelena Shulyatyeva: Our baseline is for three rate cuts.  

Steve Odland: Still?  

Yelena Shulyatyeva: Still. Because, again, we think that the impact of tariffs, uncertainty, and other things on growth will be much much bigger than impact on inflation. 

But, obviously, there are risks around it, and I think the recent developments, the EO on tariffs from the administration, is basically telling us the Fed will probably have to stay very patient and very cautious with respect to what they are going to do. Because, if tariffs are implemented in the big numbers, they will have to probably stay on hold for longer or even raise rates, and the downside risk obviously is growth falls more than we expect. Then they will have to cut more.  

Steve Odland:We're talking about The Conference Board's latest projections for the US economy. We're going to take a short break and be right back.  

Welcome back to C-Suite Perspectives. I'm your host, Steve Odland from The Conference Board, and I'm joined today by Yelena Shulyatyeva, a senior US economist at The Conference Board in our Economy, Strategy & Finance Center.  

And, Yelena, you are responsible for these forecasts going forward, you're deep into them and before the break we were talking about the Fed funds rate and what the Fed needs to see in order to feel confident to cut rates three more times. Are they more focused on growth, or are they more focused on inflation?  

Yelena Shulyatyeva: It will depend on inflation expectations and what happens to that part of the puzzle. We have seen a pickup in inflation expectations from some surveys. But some surveys saw bigger impact. Some surveys saw a small impact. I think the Fed will pay attention, a lot of attention, to what happens to inflation expectations.  

Steve Odland: More so than growth.  

Yelena Shulyatyeva: More so than in the past, and the reason is, during the previous round of tariffs, we saw inflation below the 2% inflation target. And inflation expectations were so stable and, if you saw a pickup in inflation, that didn't really de-anchor inflation expectations back then, back in 2018 and 2019. 

Now it's so much different, right? So we have just come out of a period of very high inflation that was driven by post-COVID supply chain disruptions and other factors. So consumers and businesses are very well aware of what happened, and they saw inflation hurting growth. They saw inflation very detrimental to their everyday lives. So if we see inflation start picking up again now, inflation expectations can react much more rapidly, and this is not what the Fed likes. 

So if that happens, if the Fed considers inflation expectations as de-anchoring, they will probably have to raise rates in the end and not even cut rates. But this is the biggest "if" for me.  

Steve Odland: Round numbers, what's the probability that there will be three rate cuts this year? 

Yelena Shulyatyeva:It's higher than 50%.  

Steve Odland: Higher than 50%.  

Yelena Shulyatyeva: This is our forecast, but I see a lot of risks in delaying that.  

Steve Odland:Yeah, there's a big standard deviation. around that. Sowhat's the probability of two rate cuts?  

Yelena Shulyatyeva:So this is pretty much what the market is expecting right now. It'sprobably the second highest in my ranking. 

Steve Odland: But close to 50-50 again.  

I think we will, the next rate move will be a cut, not a hike.  

And the markets, if that doesn't happen, then the markets, of course, could react terribly and have. The markets have reacted terribly to changes in predictions of the Fed. They've been very cautious in what they've said, which is appropriate, but boy, the market volatility on just the Fed watchers is crazy.  

Yelena Shulyatyeva:It's correlating with uncertainty surrounding all what is happening.  

Steve Odland: And that makes sense because you've got investment in bonds, and what's the cost of what's the price of a bond versus the yield of a bond? And then you've got the impact on the entire economy from companies who are using debt as part of their capital structure, and the cost of that, short and long term. That's what you're talking about with this uncertainty. It'sreally hard to forecast all of this, and it's all interwoven in this fabric of drivers for GDP. 

Yelena Shulyatyeva:Yeah, and the stock market movements could also impact economic growth. If we see a significant decline, say, in the stock market, that could impede the wealth effect, the positive wealth effect on consumers.  

Steve Odland: Ah, very interesting. So your point is, if the stock market goes down significantly, then people will feel less wealthy, or indeed be less wealthy. 

Yelena Shulyatyeva: Those who are in the wealthy category, in the wealthy group.  

Steve Odland: And they'll spend less.  

Yelena Shulyatyeva: And they could spend less because of that.  

Steve Odland:Yeah, it's interesting. You have more and more people relying on fixed incomes and retirement savings. So that impacts that group, too, which is the wealthiest group.  

Yelena Shulyatyeva: Totally. Yeah. Soit's all very much interdependent. It's not only the data that impacts the markets, but the market's movements impact the data, as well.  

Steve Odland:So you started the conversation talking about tariffs and policy uncertainty. We talked a lot about uncertainty, but the tariffs. Do you have a forecast of what the current tariff outlook will do to GDP?  

Yelena Shulyatyeva:So we have to distinguish between what has been implemented and what is proposed or talked about or being discussed. So for now, we have incorporated 20% additional tariff on China imports into our forecast, which is probably roughly a negative impact of two-tenths to four-tenths, according to our estimates. But if you incorporate 25% on Canada and 25% on Mexico imports into the forecast, this could easily shave off more than one percentage point from GDP growth this year alone.  

Steve Odland:Yeah. And so some people are a little apoplectic about Canada and Mexico. They're two of our largest trading partners. They're in our neighborhood. We've got the USMCA. We share a continent. We've got interlocked supply chains. So people scratch their head on it. On the other hand, other people say, if this is just a renegotiation of the USMCA, which expires next year, and so it's not real. 

How does that impact—I'm not asking you to opine on whether it's real or not unless you want to—but how does that impact the forecasting? Because they're two different things.  

Yelena Shulyatyeva: We run models, and the models are telling us that's what will happen. The reason? You increase the price of goods, and people, consequently, consumer less.  

Steve Odland: Tariffs  

Yelena Shulyatyeva:Yeah, tariffs.  

Steve Odland: Even if there's some partial absorption up the supply chain, there has to be some flow-through.  

It  

Yelena Shulyatyeva: has to be bad for businesses as well. And uncertainty that comes with it. It's not just the direct impact of tariffs, but uncertainty is the buzzword of the day. I would say it's real, OK. It's not just some concept that is in your mind, this is real.  

Steve Odland:Yeah, because you don't know what your cost structure is going to be, you don't know where your supply is coming, all of those things. OK, so are tariffs inflationary then? 

Yelena Shulyatyeva: Tariffs are inflationary, no doubt about that, no change in mind about that. I think that it's a question of timing, though. We will see a pickup in inflation, most likely in the near term. Ourview is that the growth slowdown that we are expecting will be so much more pronounced that it ultimately will push inflation down. 

Steve Odland: The subject of our discussion is the US forecast, but the US is part of a global economy. Any comments generally on the forecast and the impact of the US on the global economy?  

Yelena Shulyatyeva: We expect some deceleration in global growth, from an estimated 3.2% in '24 to 3.1% in 2025 and further deceleration going into '26. We recently slightly downgraded our projections for global growth, simply because a significant downgrade to the US economy and also to Canada and Mexico growth. And we just discussed all the negative implications for growth for those countries.  

Steve Odland:Yeah. And so, by correlation then, we don't see a global recession on the horizon. 

Yelena Shulyatyeva: Not really but it remains to be seen. Again, the situation is pretty fluid at the moment, and incorporating everything we know at this point actually doesn't suggest the recession is on the horizon.  

Steve Odland: But it is interesting because it's not like it's a static environment. It's a dynamic environment. And so even if, let's say tariffs between the US and China push the imports from China to the US down, the imports from other countries and other regions from China could take up that slack. So it could just be a complete shift of the global supply chain. But that doesn't happen overnight. 

Yelena Shulyatyeva: Totally. And that time lag actually subtracts from growth in the meantime, right?Soyou're saying, exactly right, that we will probably see some reshuffling and, at the end of the day, it will resolve itself. Over the longer run, in the short term, we could see some negative impact. 

Steve Odland: A global economic growth of roughly 3%, and it's higher in developing nations than it is in the developed nations, that's always the case, and so none of that has changed. Any other comments on the US forecast that you'd like to share?  

Yelena Shulyatyeva:I think the most interesting part is probably the labor market, and I am very interested in seeing what happens to the hiring rate as a result of all this uncertainty. 

SoI'm almost certain, or at least very high certainty, about that impacting business investment, but how does it impact the hiring rate? How does it impact payrolls? This is a very interesting question, which is probably like the most significant factor for my focus going forward. 

Steve Odland: Yeah, and every CEO we talk to is, even though there are some layoffs in certain sectors that overhired, people are still talking about talent banking, which is a lesson learned relatively recently during the pandemic, when companies lost a lot of their talent for a number of reasons. And so that's still fresh in people's memories. And you would expect their behavior to be influenced by that.  

Yelena Shulyatyeva: Absolutely. And that is probably a good thing.  

Steve Odland: Because of the consumer, the spending of the consumer.  

Yelena Shulyatyeva:Yeah, because of the consumer and the whole impact.  

Steve Odland: So hopefully, it's a less painful kind of slowdown than we've seen historically. 

Yelena Shulyatyeva: And hopefully, uncertainty resolves at some point.  

Steve Odland: As soon as possible. Yelena Shulyatyeva, thanks for being with us today.  

Yelena Shulyatyeva: Was my pleasure. Thank you.  

Steve Odland: And thanks to all of you for listening in to C-Suite Perspectives. I'm Steve Odland, and this series has been brought to you by The Conference Board.