Weak US Economic Prospects Persist Despite Temporary Trade Truce with China

Despite a brief reprieve in trade tensions between the United States and China, the broader outlook for the US economy remains lackluster, according to a Reuters poll of economists conducted from May 14 to 21.

The 90-day suspension of tariff hikes has slightly lowered the risk of recession, but deep concerns about the country's fiscal stability continue to dominate.

The economic sentiment follows a downgrade in the US sovereign credit rating by Moody’s, just as Congress prepares to vote on President Donald Trump’s expansive tax-cut legislation. Over 55 per cent of economists surveyed believe that the administration’s policies have “significantly hurt” the economy, and not a single respondent described them as beneficial.

“Moody’s is likely sending a message that the proposed tax bill is fiscally profligate... unless there is an abrupt move, the risk is that by the time Washington gets serious about the US’s fiscal problems, tariffs might be the only available lever to meaningfully reduce the deficit,” said Aditya Bhave, senior US economist at Bank of America. He added, “Another round of large tariff hikes would probably be more painful for the economy than a less expansionary fiscal package.”

The US economy, which shrank by 0.3 per cent last quarter amid a record surge in imports, is projected to grow by 1.5 per cent this quarter and just 1.4 per cent for the year—well below last year’s 2.8 per cent. Projections for 2025 suggest growth may hover around 1.5 per cent.

While the threat of recession has eased slightly—the median probability dropped to 35 per cent from 45 per cent in April—there’s no relief in sight when it comes to inflation.

Economists expect inflation to stay above the Federal Reserve’s 2 per cent target until at least 2027, aligning with consumer sentiment which remains at multi-decade highs.

“The bad news is the detente virtually locks in a slow growth, sticky inflation environment as the base case for the US economy,” warned Michael Gapen, chief US economist at Morgan Stanley. “The effective tariff rate at 13 per cent is still substantially higher than where it was coming into the year (around 2 per cent)… Policy uncertainty is high and recession risks remain elevated.”

The Fed has kept its benchmark interest rate steady within a 4.25 per cent to 4.50 per cent range since January. While just over half of the surveyed economists—52 out of 103—expect a rate cut in Q3, likely in September, a notable minority foresee cuts only in Q4 or not at all this year. Only eight anticipate a cut as early as June, compared to nearly 40 per cent last month who expected at least one cut by the end of Q2.

There’s also no clear agreement on where the federal funds rate will land by the end of 2025. However, 74 of 103 economists expect it to be in the 3.75 per cent to 4.00 per cent range or even higher, a notable shift from April’s poll where only two-thirds held that view.

According to Chris Low, chief economist at FHN Financial, “The two pauses (on tariffs) add a new degree of uncertainty to the outlook for both growth and inflation.” He continued, “FOMC participants insist on seeing all of the inflation directly attributable to tariffs before cutting rates so they might have to wait until the fourth quarter, or even early next year, before they have sufficient clarity to do anything.”

Overall, despite temporary trade relief, economists are bracing for continued sluggish growth and persistent inflation, exacerbated by fiscal policy uncertainty and elevated tariffs.

By fLEXI tEAM