U.S. Economic Outlook Q2 2025: Growth Slows Under Pressure from Shifting Policies

Updated March 27, 2025

S&P Cuts Growth Forecast, Flags Policy Uncertainty

In its latest quarterly outlook, S&P Global Ratings sharply lowered its U.S. growth forecast for 2025, citing a weakening economic backdrop driven by federal spending cuts, increased tariffs, and public-sector job reductions.

Real GDP is now expected to rise just 1.6% in 2025, down from 2.5% in 2024 and 2.9% in 2023, as policy shifts dampen both business investment and consumer demand.

Inflation Remains Elevated, Unemployment Seen Climbing

Sticky inflation continues to pressure the economy, with Core PCE inflation projected to average 3.0% in 2025—well above the Fed’s 2% target. At the same time, the labor market is expected to gradually weaken, with the unemployment rate peaking at 4.6% by mid-2026.

Key Economic Indicators – 2025 Forecast

Policy Shifts Lead to Slower Momentum

S&P’s downgrade reflects the near-term effects of President Trump’s early 2025 policy actions—specifically, trade restrictions and budget cuts—that have created headwinds for the economy. While proposed tax changes and deregulation may stimulate growth later, they have yet to take hold.

Federal workforce reductions and weaker public-sector hiring are expected to drag on job creation, while private sector hiring could slow due to heightened economic uncertainty.

Fed Expected to Cut Rates Once in 2025

Amid cooling growth and persistent inflation, S&P anticipates the Federal Reserve will cut interest rates just once this year, lowering the policy rate by 25 basis points to a range of 4.00%–4.25% by year-end. Barring a sharper downturn, more aggressive easing is unlikely.

Risks Tilted to the Downside

While a recession is not currently expected, S&P warns that economic momentum is clearly fading. Their forecast shows the U.S. economy growing just 1.55% from Q4 2024 to Q4 2025, leaving little room for policy missteps. A further slowdown in global demand or tighter credit conditions could increase the likelihood of a downturn.

Market Implications and Takeaways

S&P’s revised outlook reinforces a cautious stance for markets and policymakers alike:

• Policy uncertainty is weighing on growth, particularly via trade and fiscal tightening

• Only modest monetary easing is expected, with the Fed balancing inflation control against a weakening economy

• Labor markets may soften, especially as public-sector job losses ripple through broader employment metrics