Is Stagflation a Looming Risk?

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 latest economic forecast.

Joining me today is Erik Lundh, the senior global economist for The Conference Board in our Economy, Strategy & Finance Center. Erik, welcome.

Erik Lundh: Great to be here, Steve.

Steve Odland: So Erik, you're a global economist. You've been doing these forecasts for, I don't know, it sure feels like a hundred years.

Erik Lundh: Especially lately.

Steve Odland: You update this every month, and you look at these markets all over the world. Talk about how you do the forecast and what does it cover and so forth.

Erik Lundh: So we have a team of economists, not just here in New York, but in other parts of the world as well, in Europe, in Singapore, in Beijing. And so once a month, we all get together, we crunch the latest data, we look at what numbers have come out in various parts of the world, and we talk about it with one another.

And then from those conversations, we try to put numbers to those trajectories where things are headed down the road. And we stitch together a global set of numbers and a global narrative about what we're seeing around the world.

Steve Odland: And this is a huge database. and it goes back decades and decades and decades. We don't want our listeners to think we just kind of throw darts here.

Erik Lundh: No, we have a variety of—

Steve Odland: it's a very highly quantitative—

Erik Lundh: I mean, for instance, the leading economic indexes that we put together. We have, I think it's about 17 economies around the world, where we have all kinds of numbers that have a forward-looking dimension to them. We've built those in-house and have been publishing them for decades.

Steve Odland: Yeah. And the data are, of course, GDP by area, all the way down to most of the components of GDP, inflation, where the central banks are going, and so forth. So let's dive into what we're seeing. We just did a new forecast here at The Conference Board, and why don't you just run us through the topline of what's changed, what's different here?

Erik Lundh: I think before I can really focus on what's over the next quarter to two quarters to year, it might be helpful to back it up a little bit and talk about where have we been, especially in the US economy, which is I think is where you were focusing on, over the course of the first half of the year.

We've seen a lot of volatility, in terms of a lot of the economic data in the US, especially in Q1 and Q2. And we're expecting to see, unfortunately, a bit more of a slowdown in terms of overall economic growth in the US over the course of this year. A lot of that has to do with tariffs. There's concerns about pricing, there's concerns about the labor market, and then, of course, this has spillover effects in terms of other economies around the world, as well.

You put tariffs on India and on Vietnam and Mexico, for instance. These are big markets that really rely on US demand, and so it cascades and doesn't just affect the US but really hits other parts of the world, as well.

Steve Odland: And we'll go through each of those for our listeners, we'll go around the globe, but your point is really important, which is a lot of the policy decisions which have been taken here in the US in the past, what, six to nine months, have really scrambled a lot of these forecasts and what are happening. But let's start with the US.

So, we've had a weird couple quarters, Erik. I mean, we had a negative number in the first quarter for GDP, and then we had a big number in the second quarter. But that was adjustments on inventories and that kind of thing, right?

Erik Lundh: That's right. In the run-up to Liberation Day tariffs on April the 2nd, there was a big rush on businesses' behalf, trying to get what they needed from overseas before these tariffs went into effect, and there was a surge in imports. Imports are a negative in the GDP equation.

Steve Odland: Why? Why is that?

Erik Lundh: Well, so essentially what GDP is trying to capture is the total amount of value that's generated—

Steve Odland: In the economy.

Erik Lundh: In an economy. There's different accounting methods to try to do that. In terms of the expenditure method, this is the one that everybody learns when they're in high school or in college: Consumption plus investment, government, plus net exports. Net exports is exports minus imports. So the idea here is that within consumption, consumers are consuming things that are both made domestically and abroad, OK? And so it's not really fair to count the consumption of things that are made abroad as being value-generating in the US.

Steve Odland: Right, cause they haven't been made here. So then what you do is you take consumption and you have to, if you've got a lot of surge in imports, which is what we had in the first quarter, cause people were trying to get the cheap inventory in.

Erik Lundh: Correct.

Steve Odland: That's a big negative number on GDP, and then you flip it around. The import stopped in the second quarter, which is a big positive number.

Erik Lundh: And that's why we have the big spike.

Steve Odland: Right. So it was like, what minus half a point in the first quarter, and then up 3.3 in the second quarter, and it's just a reversal. So, isn't it fair to think of it, it's an average of those.

Erik Lundh: That's a good way of thinking about it. Trying to average it out a little bit.

Steve Odland: Which isn't exactly the right way to do it, but it's around a 1.5%-ish kind of growth.

Erik Lundh: Yeah. Yeah. You could strip out some of the components and just look at consumption or more investment or government spending and try to get away from the inventory and the trade stuff. But in general, I think it's safe to say that the US economy at its core has slowed down relative to the kinds of growth rates that we were looking at in 2024.

Steve Odland: Yeah. And that number was 2.8% growth for the total year. So that's a material slowdown. Now you're projecting, Erik, a further slowdown here in the third and fourth quarters.

Erik Lundh: That's correct. So we think that we're going to see growth rates along the lines of maybe six-tenths of a percent or so, just under 1%, I'd say, in the third quarter. And then in the fourth quarter, we're expecting growth at around the same pace. And so in a lot of ways, this has to do with atrophied consumers, prices starting to rise more so than they already have in terms of inflation, et cetera.

Steve Odland: And that results in a projection for the total year 2025 of about 1.6%.

Erik Lundh: That's right.

Steve Odland: Now, here's the problem with when you are growing at sub-1% rate. I mean, that feels recessionary. Now. It's not necessarily recessionary because the full definition of that is typically negative, there's a lot of factors that go into it. But it feels like that because it's such a slow growth that you're not seeing the same kind of additions and investment from companies and job growth. So as a consumer, it's going to feel slow.

Erik Lundh: It's going to be a challenging period, especially, people are, they're sick of going to the cash register and having to pull out an extra bill relative to what they did three or four months ago. And we're going to see a little bit of that. I'd even add on to, besides feeling recessionary, the weaker that growth rate is, the closer it is to one or 0.5, there's not a lot of wiggle room in that kind of an environment. And so it makes the US economy more susceptible to potential shocks.

Steve Odland: Yeah. And if you still have inflation going at that point, then you could—you could, we're not forecasting it—but you could end up with what's called stagflation.

Erik Lundh: Yes.

Steve Odland: Which is really an awful place to be.

Erik Lundh: It's a pickle. It's a hard thing to climb out of.

Steve Odland: You can't cure it with fiscal or monetary policy, typically, you have to just wait it out.

Erik Lundh: And shock your way out of it, to a certain extent.

Steve Odland: Yeah. Which isn't fun. So we don't wanna end up there. And stagflation is just higher inflation and slow to no growth.

Erik Lundh: And high unemployment, as well.

Steve Odland: Well, usually that's the outcome.

Erik Lundh: Yeah. Well, when you shock everything, yeah.

Steve Odland: Yeah. So, OK. And then how about for '26? So do we stabilize in '25 here, and everything's hunky-dory for '26?

Erik Lundh: We think that we'll see a bit of an improvement in terms of the trajectory of growth throughout the course of 2026. So, we'll on a quarterly basis, we'll start to maybe climb out of it a little bit. But when you put all that together and look at the full year, it still has a pretty anemic growth rate of about 1.3%.

Steve Odland: Yeah. OK. So basically, first half of 2025 was around there. Slower in the back half, but then back to where we were in the first half for 2026 in total. So you got a two-year period here, that's going to be pretty weak. And so what are the, if you had to say, what are the top two or three drivers of that?

Erik Lundh: Well, I mean, a lot of it has to do with expectations about tariffs and how they're going to impact inflation. It has to do with where the labor market is now relative to where it was a year or so ago. We are not expecting to see the labor market fall apart by any means. But we do think unemployment will tick up. Companies are going to be put into a difficult position where they're going to have to try to guard their margins, to a certain extent. And there may be some cost-cutting involved in that, in terms of reduced headcount.

Steve Odland: Now, typically when you see this reduction in growth, companies start to claw back and slow, and you start to see layoffs. We're not projecting that.

Erik Lundh: No. We are expecting to see a loosening in the labor market, but I think I should be clear about this. Following the immensely difficult period that companies had in 2023, early 2024, with regard to recruiting and retaining employees. The Great Resignation, as it's been dubbed in media. There's a lot of, I think, reluctance on the part of businesses to let people go because they are concerned that they're going to be right back where they were after COVID, trying to claw back workers and get the people that they need.

And so there's not going to be, again, large-scale layoffs. But we do think things will loosen over the coming quarters.

Steve Odland: So the number of job openings have come down. I mean, they were at what, 10, 11 million at one point, and I think we're down, 7, 8 million, somewhere in there.

Erik Lundh: Yeah.

Steve Odland: So you're essentially saying people will slow down hiring or stop hiring, but they're going to bank the talent that they have so that they don't have to start over again when you get through this thing. Is that fair?

Erik Lundh: You've got it. And you see this in the JOLTS data, for instance.

Steve Odland: Say what the JOLTS is for our listeners.

Erik Lundh: Yeah. It's a collection of data that gauge various parts of the labor market looking at things like openings, how much are businesses hiring, layoffs, and how many people are quitting. It's published on a monthly basis. It's useful to look at.

Steve Odland: And it's government data. JOLTS is an acronym. Yeah, so the data support it, is essentially what you're saying. Now, the other component of all of this is inflation. And, of course, we've been stuck here close to 3%, and you're projecting that that will actually increase here once the full effect of the tariffs kick in, and we're not just working off the cheaper inventory that we imported. Right?

Erik Lundh: That's right.

Steve Odland: And so what are you projecting here for the back half of this year?

Erik Lundh: So, I mean, we're already starting to see some of the tariffs creep into some of the inflation data, in pockets here and there. Things like furniture, things like auto prices, for instance, have gone up due to supply chain shocks. And we think that's going to intensify over the next couple of quarters. So it's taken a little bit longer than we first expected, but I think that has to do with the fact that there's been a lot of delays in implementation, in terms of negotiations that have been ongoing between the White House and various political leaders overseas.

So we've only really just started over the summer period to see a lot of these tariffs actually start to be put in place at the border. And so it'll take a bit of time to creep into the larger inflation data, topline numbers. And we're really expecting to see this more in Q3 and Q4 of this year.

Steve Odland: Yeah. And that carries over a little bit into 2026. But then you're projecting gradually that inflation, the rate of inflation will decline. Now the problem with that is that consumers keep hearing, "Oh, inflation will decline." They're not thinking about it in terms of the rate of inflation being less. They're thinking about—

Erik Lundh: Overall prices.

Steve Odland: Yeah. When are my prices going to come down? And they're not going to come down.

Erik Lundh: No, they're not.

Steve Odland: Because we're still going to have inflation, which means they're actually going to continue to go up.

Erik Lundh: The only way they come down is if you have basically disinflation, deflation, sorry, which is negative inflation, which is a very, actually—it's symptomatic of the economy really falling apart.

Steve Odland: Yeah, you have collapses of whole countries when that happens.

Erik Lundh: Exactly.

Steve Odland: So you don't want that to happen.

Erik Lundh: You want it on a personal level, but when you actually think about it, you don't want to be living in a world where that's happening.

Steve Odland: Exactly. Correct. Yeah. So basically this is, I think this is the gap with the politicians and the voting base or the consumers, because they keep saying, "Hey. You promised inflation would come down." Well, it has. And it will, but it's still rising prices. And people are living, the majority of Americans are living paycheck to paycheck. And that's hard.

OK. So then the final thing is, what's the Fed going to do? Because they've got a dual mandate. So describe that mandate.

Erik Lundh: So the Fed has a dual mandate where, on the one hand, it is trying to limit the amount of inflation in the economy. The Fed targets about 2% annual inflation per year. So that's, that's one part of their mandate.

The other part of their mandate is to ensure full employment, to keep the labor market in a healthy position. And the way that they do that is by manipulating interest rates and making them higher and lower to try to fight inflation. When inflation is high, they rais interest rates. And when unemployment rises, when the labor market's loose, it's usually symptomatic of the economy as a whole being sluggish. They lower interest rates in that kind of an environment to try to bolster growth.

Steve Odland: And so we're projecting that the Fed, in order to, they're going to say, OK. Inflation, rate of inflation, is starting to come down, but the job market's starting to weaken. And so maybe we take a little pressure off. And that means maybe we'll lower the discount rate by a little bit. And so we're forecasting a couple moves here.

Erik Lundh: Yeah. But I think we're going to get, I mean, certainly tomorrow, we're going to see some movement in terms of the FOMC. The Fed is meeting right now, today and tomorrow, and we'll get an announcement tomorrow about what they're going to do.

We think we'll get a 25-basis-point cut, and then we think we'll get another one in November and then a third one in December. So we're forecasting, at the moment, three cuts over the course of the remainder of this year,

Steve Odland: And then a couple more in '26.

Erik Lundh: That's correct.

Steve Odland: And if we don't get three, if we only get two in the back half of 2025, it'll probably be three in '26. It's somewhere in there.

Erik Lundh: It's a moving target. Yeah.

Steve Odland: Yeah. I mean, but it'll be around five-ish, which is one-and-a-quarter total points, which then should flow through. Now people will earn less on their money market funds, and bond yields will come down. But at the same time, the cost of debt, mortgage rates, and car loan rates and consumer credit rates should also ease a little bit.

Erik Lundh: Businesses and consumers are going to be more willing to borrow to build things, to buy things, which should prop up growth.

Steve Odland: We're talking about the forecast in the US and the global 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 Erik Lundh, the senior global economist for The Conference Board in our Economy, Strategy & Finance Center.

OK, Erik, the first part before the break, I think we went through the US in a great amount of detail. We're not going to do that for every country, but let's just talk about first Europe, then China, and then, some of the other areas of the world. So kick off with the whole Euro area.

Erik Lundh: Well, it's a big place, so we do a forecast for the entire Euro area, then also all the individual economies as well. We have some great colleagues in Brussels that help with all this work.

So, in terms of the Euro area, what we're expecting to see is a little bit of an acceleration in growth over the course of late 2025. In general, the continent performed better in the first part of this year than was expected. There was a lot of worry about tariffs really dampening the growth environment there.

But as I mentioned, just as there was a surge in imports into the US to beat tariffs, there was a surge in exports from these countries, too, to the US, right? So people wanted to get companies wanted to stock up on their wines and their cheeses and things like that.

Steve Odland: Parts, auto parts.

Erik Lundh: Exactly. And so we saw Europe benefit from that over the course of the first part of the year. So it really depends on where you look. In Europe, some economies are doing better than others. Spain has been performing really, really well over the last really couple of years. Italy's doing decently in terms of their growth environment.

Germans have had mixed performance. The Germans' economy actually fell into recession in 2024 and have been clawing their way out of it. There's some issues there in terms of investment, for instance, in Germany that have made that challenging.

And then, in terms of France's economy there, there's really been some challenges, most recently as some of you may have read about, there's been a collapse in the French government as a function of negotiations over the 2026 fiscal budget. It's very contentious. They're trying to cut back on spending. And it's a very challenging thing to do among the French people.

Steve Odland: Yeah. It's socially difficult to do, and they've had a change in government as a result of all that. So basically what you see, though, is a little bit of timing, too, because they had a surge in exports here in the first part of the year, which then should reverse and hurt their economy. So the numbers for the back half of '25 should be a little lower.

Erik Lundh: But that's not the only—I mean, there are other elements of the economy, again, broadly speaking, in Europe. Consumer confidence has been decent. The labor market in Europe has actually been holding up very well. And so yeah, there'll be some headwinds as associated with the flip side of the trade equation, in terms of all these pre-orders that were done earlier in the year are not going to manifest themselves in the second half for those countries. But again, the other parts of the economies are doing fairly decently, as well.

Steve Odland: But you have to point out, the United States was at 2.8% GDP growth last year. It's 1.6% this year, and we're projecting Europe to go from 1.1% last year to 1.2% this year. So it's a little tiny bit better. But it's still growing at a rate that's a lot weaker than the US rate.

Erik Lundh: That's true, and that's not atypical. The growth environment in the US, especially in the recent decades, has been stronger than a lot of the growth numbers coming out of Europe.

Steve Odland: Yeah. OK. Let's turn to China, cause China is increasingly a really important player in the global GDP. Talk about what's happening there.

Erik Lundh: There's a lot going on In China. I mean, China's a huge trade partner of the US', so obviously the tariffs have impact there. But beyond that, there are domestic problems in China that they've really been trying to grapple with for a while now. There's been a multi-year collapse in the property market in China. There's a lot of anemia among consumer confidence. Consumer spending hasn't been as strong as the government, I think, would like it to be.

And at the same time there, there's a lot of debt issues, especially at the local government level. There's been a lot of financing of infrastructure projects over the years that wasn't done responsibly. And so a lot of debt has accumulated at the local level, and the central government is trying to figure out how to navigate all this stuff.

Steve Odland: Yeah, and it's interesting in China because it's more of a centrally driven economy, and so you don't have private developers, for example, responding down to the neighborhood level and building to suit demand. They do master plans, and I mean, it's really remarkable when you go over there, and they show you a whole city that they're going to build. They do the master plan, they build the thing. And then they assume people will come. And in this case, it hasn't happened.

Erik Lundh: And they overbuilt.

Steve Odland: They've overbuilt.

Erik Lundh: They overbuilt.

Steve Odland: And so this has been a big problem for them, but they're also doing Belt and Road, too, which means that they're investing around the world. And that's a geopolitical strategy on their part. So you have a lot of different moving parts in China.

Erik Lundh: You do. You do. But the growth environment this year, I think, has been especially challenging as the US has upped the number of issues that they have to grapple with. The government publishes every year a GDP target. For 2025, that target is 5%.

Steve Odland: We don't think that's going to happen.

Erik Lundh: Our forecast is below, we think somewhere between 4.5 to 5%. The government has been doing stimulus, they've been lowering interest rates, trying to bolster growth, and it's worked in the first half of 2025, in terms of the GDP numbers that they've published,

Steve Odland: That stimulus, though, is costly. I mean, they've driven their debt to GDP up to what—

Erik Lundh: They have.

Steve Odland: Around 100%.

Erik Lundh: Yeah. I mean, it's gone up quite a bit.

Steve Odland: I mean, the US debt has gone up substantially, but theirs have, as well, which has, in the case of both countries, it leaves them with not a lot of dry powder in case of a problem.

Erik Lundh: That's true. That's true. More recently, in some of the monthly data, we have started to see things cool down. Retail sales, industrial production, something called industrial value added. For months of July and August, they've started to decelerate. They're not growing as rapidly, and so, it's the expectation that the second half of this year will be softer than, than the kind of growth numbers that we saw in the first half of the year.

Steve Odland: Now, Japan and India are also substantial economies in Asia. Talk about those two.

Erik Lundh: We actually had a pleasant surprise from Japan. The Q2 GDP numbers in Japan were actually quite a bit higher than forecasters that had been expecting.

Steve Odland: Was that an inventory issue too?

Erik Lundh: Actually, it had to a certain degree to do with exports to the US, but also some of the consumption numbers were stronger than expected in Japan, as well. So that overall really drove a bit of an upgrade in terms of our outlook in Japan for 2025.

But there, as you had mentioned there, there's other stuff going on. The US had implemented fairly sizable tariffs on Japan. Tokyo negotiated—they got in touch with Washington and had talks, and a framework was agreed to.

Steve Odland: Verbally.

Erik Lundh: The rates are lower than they could have been, but it's been very unpopular In Tokyo and in Japan. And as a function of that, the prime minister just resigned. So that's, we look at that as a bit of a downside for the economy, potentially, as policy could be undermined in '26.

Steve Odland: And for our listeners, this is where we started this podcast. The things that are decided here, the political and policy decisions from the US have impact around the world. And that's just one example in Japan, I mean, it's hurting some of these other economies as a result. So let's move on to India.

Erik Lundh: India also, India has been humming along. Yeah, they've been doing great.

Steve Odland: They got a lot of people.

Erik Lundh: They got more people than China now. I think it got larger than China maybe about a year or two ago. Yeah, the economy is growing very well. We haven't seen a lot of disruptions associated with all this trade strife, but there are concerns about it getting worse.

The administration recently increased the tariff rate from 25% to 50% on India. India's own finance minister has acknowledged that that could be detrimental to GDP growth, e specially over the next year. So we're watching that closely. We still think we'll get growth out of India in 2026, but perhaps just not as robust as what we are seeing in 2025 and last year.

Steve Odland: Yeah, but you're still talking something close to 6%.

Erik Lundh: Yes.

Steve Odland: Which is really remarkably different.

Erik Lundh: It's great.

Steve Odland: And hence, it's considered a developing economy cause the GDP per capita is so much lower than everywhere else. So the rate is slowing though, to your point. But it's still pretty substantial.

Erik Lundh: If you look, if you compare it to a major economy like China, it's growing much more rapidly than China is. But also, it's not nearly as developed as China has become.

Steve Odland: So it's got a long way to go.

Erik Lundh: Yeah.

Steve Odland: Any other key points around the rest of the world that you wanna share with us?

Erik Lundh: Just in general, we stitch all these numbers together to come up with a global GDP forecast, as well. And we're expecting that to slow in 2025 and 2026. The global economy, once you were just for inflation and a couple of other things expanded by about 3.3% in 2024. We're looking at about 3% growth for this year, and then maybe something along the lines of 2.9% growth next.

Steve Odland: Yeah. And then if you look over the next decade, we're saying mid-twos. So this is a really different global economy in the next decade than it has been in the last decade. The last decade has been mid-threes. This is almost a hundred basis points lower, and that's even including productivity gains from AI and other digital tools.

So, it'll be interesting to see. And that will have geopolitical ramifications and domestic issues and so forth. And it really something that, the economists look at the numbers, but there are real big social changes that could happen here, as well.

That's one way to think about it. Another way to think about it is, well, you've got more developing economies becoming more mature and developed, so that's sort of a natural—

Erik Lundh: Slowdown in growth, as well.

Steve Odland: Evolution of the world.

Erik Lundh: Yeah, I'm really glad you brought up the AI question. That's the wild card. That is the wild card on so many different levels, geopolitically, socially, economically. We make projections about productivity growth over the next 10 to 15 years. But it's very difficult to know what AI is going to look like in 5, 10, 15 years.

So it could create a renaissance in productivity where we see a reacceleration in terms of the global economy. But there are other headwinds associated with demographics that are going to slow down growth, as well. So it's a challenging time to try to make these kinds of projections.

Steve Odland: A lot of moving variables. And you can't solve for one. And that's what makes it harder. For the mathematicians who are listening, it's multivariate analysis. And we know how well that goes. Well look, the technology or digital revolution throughout the 1990s added what, a hundred basis points to just the US GDP in that era and more elsewhere. So it's happened before. It's not unthinkable that could happen again, but as we said, the economies are much more developed today, so it becomes harder and harder.

Any other final thoughts?

Erik Lundh: I guess, some of the risks that we're watching. May touch on those quickly. The trade war could go either way in terms of getting worse or improving. That can have implications in terms of the global economy. There's still a ton of geopolitical risk out there, whether you're in the Middle East or you are in Eastern Europe or East Asia, as well. That all has potential implications. And then some of the domestic political volatility that we're seeing in places like France and even here in the US, as well. That has implications potentially, as well.

Steve Odland: Yeah. And we seem to have black swan events every, what, two or three years. And if that continues, well, who knows? I mean, by definition, they're not forecastable.

Erik Lundh: That's why we have the gray swans, Steve.

Steve Odland: And the Gray Swans tool has been developed by your group.

Erik Lundh: That's right. My team and I worked together for quite some time to put together a laundry list of these gray swans, is what we call them. They're low-probability, high-impact events that could impact businesses, not just here in the US, but globally.

So, we've got about 80 different scenarios where we're looking at the events, the potential implications. The regional implications. This is a North America problem. Is this an Asia problem? But also even beyond that, trying to drill down into industry exposures, too. So we just recently launched this. We're very excited about it. We've had some great feedback from our members. So please stop by the website and download it, and tell us what you think.

Steve Odland: TCB.org. Look for the Gray Swans tool. And if any of our listeners want to help with their contingency planning, this is a great way to do it. Erik Lundh, thanks for being with us today.

Erik Lundh: Thanks for having me.

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