ECONOMIC REVIEW - October 2025
ECONOMIC REVIEW - October 2025
Brian Goodstadt, CFA
Chief Investment Officer/Managing Partner
Economic Growth Continues as Tariff Uncertainty Fades
Economic growth remains modest as tariff uncertainty declines. While tariff rates remain very high, actual rates paid are lower than announced, providing some relief to businesses and consumers, as shown in the chart below. As of September, actual tariff rates are 9.7% vs. announced tariff rates of 17.4%. Economic activity has improved slightly, but warning signs point to potential softening ahead. 
So far, businesses have absorbed most tariff costs, but consumers are expected to bear a larger share soon, potentially costing them $2,300 annually per household in higher prices, according the Yale Budget Lab. Goldman Sachs estimates that only 22% of tariff costs have been paid by consumers so far, but this could rise to 67% in the coming months. The Supreme Court will review the legality of current tariff structures later this year, introducing additional policy risk.
GDP growth for 2025 is projected at 1.8%, weaker than a year ago but better than initial worst case scenarios. However, much of this growth has been driven by capital spending on AI datacenters, while the rest of the economy has shown sluggish growth.
Inflation is forecast at 2.8% for CPI and 3.0% for core PCE (personal consumption expenditures). Recession odds stand at roughly 33% over the next 12 months, according to a consensus of economists. Corporate earnings remain a bright spot, with 10.5% growth expected this year, driven by large technology firms and record share buybacks. Earnings growth rates and forecasts are shown below.
The global economy is forecast to grow 2.9% this year, slightly lower than last year’s 3.3%, and higher than predictions from three months ago. In 2026, global GDP growth projections are also 2.9%.
Labor Market Weakness Prompts Fed Action
Despite stable growth and elevated inflation, labor market conditions have softened over the past four months. Immigration restrictions have stalled population growth, reducing labor supply needs, but even after adjusting for this, job growth has been weak, and unemployment has inched higher.
This labor market weakness prompted the Federal Reserve to cut interest rates in mid-September despite inflation running above target. Additional cuts are likely in the months ahead.
Federal Debt Outlook and the AI Wildcard
Federal debt has surged in recent years, but interest expense as a percent of GDP remains at levels last seen in the late 1980s and early 1990s (as shown here), suggesting the debt burden may not yet be critical.
However, persistent budget deficits above 6% of GDP mean debt levels are poised to rise, with forecasts showing debt-to-GDP climbing from 100% to over 150% over the next 30 years. A potential mitigating factor is productivity gains from artificial intelligence. If AI boosts economic growth or reduces inflation, debt ratios could rise far less than current projections suggest, as shown below.
The Congressional Budget Office highlights several scenarios under which debt levels can grow or shrink significantly with just minor adjustments to key economic data points, as shown below. For example, small changes in productivity could materially alter debt trajectories:
- Baseline projection 156%
- +0.5% annual productivity growth Debt-to-GDP falls to 113%.
- -0.5% annual productivity growth Debt-to-GDP rises to 203%.
Summary
Economic growth continues at a modest pace as tariff uncertainty fades, though consumers may soon bear more costs as businesses pass them along. GDP growth for 2025 is projected at 1.8%, with inflation near 3% and a 33% recession probability. Corporate earnings remain strong, boosted by tech and stock buybacks, but job growth is weakening, leading the Federal Reserve to cut rates despite above-target inflation. Federal debt levels are high and projected to rise further, though AI-driven productivity gains could help ease future debt burdens. Slight changes in productivity growth could dramatically alter long-term debt-to-GDP forecasts.