July 25, 2025
Economists are always looking for that next important piece of information. This coming week we get two critical data points plus the outcome of Fed meeting in Washington. This trifecta of events could impact forecasts for the second half of the year. The action begins on Wednesday morning with our first look at GDP data for the second quarter. Then, the Fed’s Open Market Committee meeting will conclude on Wednesday afternoon. Finally, on Friday we get the employment report for July. It is possible that surprises from these three events – which rarely line up so closely together — alter the prevailing view that the economy will chug along at a relatively slow pace in the second half of the year, inflation will edge its way lower, and the Fed will cut rates once or twice between now and December. It could be an exciting week.
On Wednesday morning we get our first look at second quarter GDP. The initial estimate of GDP growth for any quarter is released one month following the end of the quarter. We will see two other reports about second quarter GDP growth at the end of August and September but the revisions are typically small. If there is going to be a surprise it will be in this release.
The reason this particular GDP report is so important is because of business behavior early in the year caused by the imposition of tariffs in early April. Business raced to import goods they might need in subsequent months between January and March — prior to the imposition of tariffs. The surge in imports was subtracted from the GDP calculation and, as a result, GDP declined 0.5% in the first quarter. Because businesses already had most of the imported goods they needed, imports fell sharply in the spring. The lower level of imports caused GDP growth for the second quarter to surge, but because of missing data we do not yet know how strong that might be. GDP growth in both quarters was distorted – one to the low side, one on the high side – which makes it hard to discern the underlying trend rate. The consensus appears to be for GDP growth in the second quarter of 2.5%. Underlying growth in the first half of the year will be roughly in line with average GDP growth for the two quarters or, in this case, about 1.0%. But is that accurate? We are looking for second quarter GDP growth of 3.5% which would raise trend growth for the first half to 1.5%.
Wednesday afternoon the Federal Reserve will reveal the level of the federal funds rate going forward. Nobody expects a rate cut at this meeting. That would be true almost regardless of the Fed’s economic outlook because of interference from President Trump who is lobbying hard for an immediate reduction followed by additional rate cuts in the months ahead. He has threatened to fire Fed Chair Powell. The Fed absolutely cannot cut rates now. It would appear that the Fed caved to political pressure which would be a disaster for the bond market. Rather than the change in the funds rate, economists will closely examine Powell’s remarks at the press conference and reassess the possibility of future rate cuts. The markets expect one or two rate cuts between now and yearend. We believe that the economy is somewhat stronger than others believe and that the inflation rate will remain stubbornly high between now and yearend. As a result, we think that the economic situation will not warrant a rate cut between now and then (unless politics enter the equation).
Finally, on Friday we get the employment report for July. This will be the first important tidbit of information for the third quarter. Employment growth surged in 2021 and 2022 as the economy and the jobs market recovered from the recession. It has been slowing gradually since as uncertainty caused by the imposition of tariffs and the deportation of illegal immigrants have taken a toll. The consensus appears to be for a jobs gain in July of 110 thousand. We are a bit stronger at 135 thousand. A significant weakening of the labor market would justify a Fed easing move later this year.
The unemployment rate surprisingly declined 0.1% in June to 4.1% as the labor force shrank. presumably because some foreign-born workers were expelled from the country. That makes sense, but the labor force has an unfortunate tendency to be very volatile. For what it is worth, we expect the labor force to rebound in July by about 200 thousand and the unemployment rate to increase 0.1% to 4.2%. Will it do that? Check it out on Friday.
The point is that economists and investors will be deluged with new information at the end of this coming week by events that normally do not coincide. Surprises could occur. Stay tuned. Should be a fun week.
Stephen Slifer
NumberNomics
Charleston, S.C.
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