As the U.S. enters the second half of 2025, signs point to a fragile economic environment. Bill Adams, Chief Economist at Comerica Bank, highlights that real GDP contracted more than previously estimated in Q1, and while Q2 may show a slight rebound, the recovery lacks depth. Economic indicators such as retail sales, industrial production, housing starts, and new home sales all declined in May, painting a picture of a cautious consumer and business sector. Even with a narrowed trade deficit drag, overall growth is expected to remain subdued.
Labor Market Weakness Masked by Slower Immigration Growth
While job demand is softening and jobless claims are rising, the unemployment rate may not accurately reflect labor market stress. Adams points to slower labor force growth driven by tighter immigration policies under the Trump administration. Since most of the labor force expansion from 2020 to 2025 came from foreign-born workers, the recent policy shift is likely muting labor force growth. The Bureau of Labor Statistics’ lag in incorporating immigration data into monthly reports further obscures the true state of the labor market.
The Fed’s Focus: Employment Stability Over Economic Expansion
Despite weak GDP and soft labor data, Adams believes the Federal Reserve won’t be swayed into cutting rates unless there are significant job losses. The Fed’s mandate targets maximum employment rather than GDP growth. As long as job losses remain minimal and the unemployment rate holds, the Fed is unlikely to act. Additionally, fiscal policy in 2026 is expected to be more supportive due to tax cuts, offsetting the current year’s tariff-related headwinds.
Inflation—Not Jobs—May Drive Rate Cuts
According to Adams, if the Fed does cut rates in 2025, it will likely be due to cooling inflation rather than labor market deterioration. While forecasters expect inflation to rise as tariffs impact prices, falling oil and egg prices, combined with flat housing costs, could help contain core CPI growth. Shelter inflation—making up two-fifths of the core index—is already slowing. Ultimately, the Fed is more likely to act on unexpectedly low inflation than on a job market that, while weakening, remains stable on paper.
