Economic Update: Week of September 22, 2025

Growth

The U.S. economy grew 3.3% annualized in 2Q25, although trade distortions continued to mask slowing momentum. Consumer spending rose 1.6%, while business fixed investment and government spending rose 5.7% and shrunk 0.2%, respectively. The housing market remained challenged as residential fixed investment fell 4.7%. Turning to the more volatile components, inventories fell, removing 3.3%pts from GDP growth, while a sharp decline in imports caused net exports to boost growth by 5%pts. Excluding these components and government spending, real final sales to private domestic purchasers rose 1.9% annualized in 1H25 vs. 3.1% in 2H24. All to say, policy uncertainty weighed on economic momentum in 1H25.

Jobs

The August Jobs report showed a sharp slowdown in hiring momentum, with nonfarm payrolls rising by just 22k (cons. 75k). Revisions made the picture look even more bleak, removing 21k jobs from the prior two months. In fact, employment now contracted by 13k in June, the first decline in payrolls since December 2020. Services continued to dominate at the sector level, while the closely watched unemployment rate rose to 4.3%. Elsewhere, wages rose 0.3% m/m and 3.7% y/y. With downside risks to employment growing more apparent, the FOMC is all but certain to cut interest rates in September.

Profits

The second quarter earnings season has come to a close. 2Q25 EPS came in at $67.03, representing y/y growth of 10.7% and q/q growth of 5.3%. Looking at the three main sources of EPS growth, sales, margins and shares contributed 5.4, 6.2 and -0.8 percentage points, respectively, to y/y growth. 81% of companies beat estimates, and earnings came in 8.0% above consensus. While we’re not seeing the impact of tariffs yet, management teams are thinking through supply chains, price increases, capex and hiring plans. Tech earnings were especially important this quarter, with the Mag 7 contributing 52% of the y/y earnings growth.

Inflation

The August CPI report showed a pickup in inflation, with headline CPI rising 0.4% m/m (2.9% y/y) and core rising 0.3% m/m (3.1% y/y). Food and energy both ran hot, as expected, with notable gains in groceries and gas prices. Core goods prices rose 0.3% m/m, with some import-intensive categories seeing large price increases, but inflation elsewhere was more mixed. Core services also rose 0.3% m/m. In the details, shelter inflation rose 0.4%, while travel-related categories accelerated, including a 5.9% jump in airfares. While the ultimate impact of tariffs on inflation remains unknown, recent labor market weakness could cause the Fed to cut rates multiple times by the end of the year.

NEW THIS WEEK

Rates

After a nine-month pause, the Federal Reserve resumed its easing cycle at its September meeting, cutting the federal funds rate by 25 bps to a range of 4.00% to 4.25%. Changes to the statement language acknowledged that risks to employment have risen, although inflation was still described as somewhat elevated. Refreshed economic forecasts were largely unchanged from June, with growth nudged higher for this year and next, and inflation forecasts bumped up for 2026. During the press conference, Chairman Powell explicitly stated that this cut was a “risk management” move. Softer labor markets should allow the Fed to focus more squarely on employment without abandoning vigilance on inflation, allowing it to cut rates two more times in 2025.

Risks

• Tariffs could challenge economic growth while putting upward pressure on inflation.
• Market volatility will likely remain elevated until policy uncertainty turns to policy clarity.
• Slowing economic growth could weigh on earnings and forward guidance.

Investment Themes

• Fixed income offers attractive levels of income and protection against an economic downturn.
• The ongoing equity market rotation should present opportunities in sectors outside of tech.
• Higher government spending in Europe and China should support better international performance.

This weekly update provides a snapshot of changes in the economy and markets and their implications for investors.

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Originally Posted September 22, 2025 – Economic Update

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