Economists see stronger US growth, but weak job gains and stickier inflation

The latest National Association for Business Economics (NABE) survey upgraded the U.S. economic outlook, projecting 1.8% GDP growth in 2025, primarily driven by a sharp increase in business investment, particularly in AI and computing capacity, which is expected to offset weaker consumption and trade. However, the survey highlights persistent challenges including the negative impact of tariffs, slower job growth, and stickier inflation, with PCE inflation only reaching 2.5% by 2026. This outlook suggests the Federal Reserve will likely implement only one more rate cut this year, a slower pace than current market expectations, despite an improved growth forecast.

Analysis

The National Association for Business Economics (NABE) survey upgraded the U.S. economic outlook, projecting 1.8% GDP growth in 2025, an increase from the 1.3% forecast in June. This improved outlook is primarily driven by a sharp increase in business investment, particularly in computing capacity and artificial intelligence, now expected to grow 3.8% this year compared to 1.6% previously. This surge in investment is anticipated to offset weaker consumption and global trade.

Despite the upgraded growth forecast, significant headwinds persist, including the ongoing drag from import tariffs, which over 60% of economists estimate could reduce economic growth by up to half a percentage point. Inflation, as measured by PCE, is projected to end the year at 3% but is only seen declining to 2.5% by 2026, indicating a slower return to the Federal Reserve's 2% target than previously anticipated. Job growth remains tepid, averaging just 29,000 per month for the rest of this year, contrasting with the stronger GDP outlook.

The survey suggests the Federal Reserve will likely implement only one more interest rate cut this year, a slower pace than the two quarter-point cuts currently priced into market contracts. This reflects the "stickier" inflation outlook and the disconnect between robust business investment and sluggish job creation. Residential investment remains a weak spot, projected to contract 1.6% this year, contrasting sharply with the strong performance expected from AI-driven capital expenditure.

Key Decisions for Investors

• Investors should anticipate a more hawkish Federal Reserve stance than current market pricing suggests, with potentially fewer rate cuts due to persistent inflation and robust business investment.
• Consider re-weighting portfolios towards sectors benefiting from significant business investment in AI and computing capacity, while exercising caution in consumer-facing and residential real estate segments.
• Monitor the ongoing impact of tariffs on corporate margins and consumer prices, as well as the divergence between strong GDP growth and weak job creation, which could signal underlying economic imbalances.