The US economy is showing unexpected resilience in the first half of 2025, but mounting uncertainty over trade policy and slowing domestic demand are likely to weigh on growth through the rest of the year, according to economists at Wells Fargo.
Revisions to income data and weaker import growth could provide a temporary boost to GDP, particularly in the second quarter, analysts noted.
However, the underlying trend in domestic demand is weakening, and the overall growth rate is still expected to be the slowest year-end pace outside of a recession since at least the early 1990s.
While headline growth metrics are getting a lift from trade-related distortions, the domestic economy is showing signs of losing steam, Wells Fargo economists wrote. They pointed to a key measure of underlying demand—real final sales to private domestic purchasers—which excludes volatile trade and government components. That measure is projected to contract in the second half.
Two trade developments in May added to the uncertainty. The US and China agreed to pause escalating tariffs, temporarily lowering the average effective US tariff rate to 14% from 25%. But a court ruling also challenged the president’s authority to impose certain tariffs, raising the possibility that some duties—such as those on Canada and Mexico—could be repealed, pending appeal.
Despite the drop in tariff rates, Wells Fargo said uncertainty remains high, disrupting business investment and consumer behavior. Tariffs have already contributed to a pull-forward in demand earlier in the year, followed by a steep drop in imports in April and slowing goods spending. Input costs are also rising, with firms reporting higher prices in both manufacturing and services.
While companies have indicated plans to pass on some of these costs to consumers, price hikes have so far been limited. Consumer price inflation remains muted, with core CPI rising just 0.1% in May. Wells Fargo said many businesses are reluctant to test consumer tolerance for higher prices and may instead absorb costs or cut spending elsewhere, including on labor.
The labor market remains stable for now, with 139,000 jobs added in May and unemployment holding at 4.2%. But the report highlighted signs of softening, including narrower hiring across industries and declining job openings. As tariff-related costs grow, hiring is expected to slow further.
Wells Fargo now expects 75 basis points of Federal Reserve rate cuts this year, down from its previous forecast of 100 basis points. A September rate cut remains likely but will depend on signs of labor market weakness in the coming months.