Macroeconomic Update: Resiliency Remains

After a surge of imports led to GDP contraction of -0.5% in Q1 2025, Q2 looks to have swung back to positive growth. As of July 3rd, the Atlanta Federal Reserve GDPNow projected Q2 GDP growth of 2.6% (based on current economic data). Uneven growth in the first half of the year took place against a backdrop of ongoing trade negotiations, geopolitical shocks, and domestic budget negotiations. We remain cautious about the strength of economic growth over the full year 2025, but we have reduced our concerns about the possibility of an immediate recession.

Employment remained resilient in the first half of the year, with U3 Unemployment at 4.1% (as of June 2025). While significantly above the post-pandemic low of 3.4% (reached in April 2023), the current level is still considered near “full employment” by the Federal Reserve. We continue to focus on labor market resilience as the key indicator of US economic strength, and we are closely monitoring the trends. Despite the recent uptick in layoffs and initial unemployment claims, we have yet to see a sustained pattern of weakness that would alter our view of the overall health of the economy. We will continue to monitor data on employment trends and incorporate any new information into our outlook.

While we see employment holding up well, we see inflation as a source of risk in the back half of 2025. Inflation has remained stubbornly above the Federal Reserve’s long-term target of 2%. As of May, the Headline Consumer Price Index (CPI) was +2.4% and Core CPI (which excludes volatile categories like food and energy) was +2.8% (for the preceding 12 months). Meanwhile, the Federal Reserve’s preferred measures of inflation, the Personal Consumption Expenditures Price Index (PCE) and Core PCE, were +2.8% and +2.3%, respectively. In June, the Federal Reserve released an updated forecast of where they anticipate inflation to end the year, which showed both PCE indices climbing above +3.0%. This expectation of higher inflation in the latter half of the year is why the Federal Reserve has been reluctant to lower interest rates.

The volatility we saw in the first half of 2025 was partially driven by rapidly shifting expectations for both the U.S. and global economies. The potential realignment of global trade flows had a significant knock-on effect for both equity and fixed income assets, which led to significant swings in asset prices. Furthermore, fiscal policy deliberations, which have swung from deficit-reducing cuts to expanded deficit spending, also caused significant volatility. We believe policy uncertainty casts as much of a shadow on economic growth as the actual policies, but some of these are likely to be resolved over the summer. With uncertainty removed later in the year, both businesses and individuals should find greater confidence in planning and making economic decisions. This confidence should eventually lead to lower volatility in the economy and markets.

While the economic picture remains clouded, we are optimistic that growth will remain positive, inflation will not return to 2022 levels, and the employment picture will remain relatively healthy. We continue to believe holding a diversified portfolio of Equities, Fixed Income, and Alternatives with a focus on risk management is particularly important in this uncertain economic environment.

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.