Macroeconomic Update: Rates Down, Inflation Up

GDP for Q2 2025 was a resurgent +3.8% (as of the 3^rd estimate) after a revised decline of -0.6% in Q1. This strength likely persisted into Q3 as the Atlanta Fed GDPNow is projecting +3.8% growth in the recently completed quarter (as of October 1^st). Resilient growth has taken place amid persistent trade tensions, a slowing job market, geopolitical shocks, and now a government shutdown. While we remain cautiously optimistic on the trajectory of full-year 2025 GDP growth, we believe there could be some slowing of economic activity in Q4. Importantly, we are still not anticipating a recession this year.

The previously resilient employment picture has seen some pressure lately as the pace of hiring has slowed and the number of job openings across the country has declined in recent months. The picture has been further complicated by the government shutdown, which prevented the release of the September Employment Report. Per the most recent official data available, U3 Unemployment stood at 4.3% at the end of August. This level is still very close to the Federal Reserve’s target for “full employment,” however, the trend of slower hiring reflected in the August report and some earlier revisions indicates an economy that is no longer adding jobs at the robust pace seen previously. We continue to monitor alternative employment data sources for indications of the health of the labor market and its impact on the greater economy.

Inflation, the other side of the Federal Reserve’s dual mandate, remains stubbornly above target. As of August, the Headline Consumer Price Index (CPI) was +2.9% and Core CPI (which excludes volatile categories like food and energy) was +3.1% (for the preceding 12 months). The Federal Reserve’s preferred measures of inflation, the Personal Consumption Expenditures Price Index (PCE) and Core PCE, were +2.7% and +2.9%, respectively. In September, the Federal Reserve updated its forecast of where they anticipate inflation to end the year to +3.0% for PCE and +3.1% for Core PCE. The potential for higher inflation at a time of a potentially softening jobs market complicates the path of monetary policy.

Volatility in markets from the first half of the year gave way to strong gains during the third quarter. The tax deal during the summer (OBBA) provided a backdrop of certainty for corporate and personal tax policy, which influenced economic decision-making and reduced volatility. We still see the potential for lingering policy uncertainty around trade, interest rates, geopolitics, and the funding status of the federal government as potential sources of volatility during the remainder of 2025. Asset prices have gone through a period of significant appreciation in a short span of time against a clouded backdrop. We believe that caution is paramount during periods like the current environment.

We remain optimistic that growth will remain positive, but believe inflation will remain somewhat above the near-term target. The recent weakness in the labor market has given us some concern about the sustainability of economic growth at the levels seen throughout the summer. We anticipate a deceleration in economic activity going forward, but a sudden drop in growth, leading to a recession, is unlikely.

This Commentary is provided by Spraker West Wealth Management, a registered investment advisor, and is for informational purposes only. It should not be construed as investment advice and is not intended as a solicitation of any specific product or service. Investments and/or investment strategies include risk including the possible loss of principal. There is no assurance that any investment strategy will achieve its objectives. Information provided is not intended as tax or legal advice and should not be relied upon as such. You are encouraged to seek tax or legal advice from a qualified professional.