Recently, UBS released a comprehensive report analyzing the economic outlook for the United States from 2025 to 2027. This extensive report delves into crucial areas such as economic growth, employment trends, inflation rates, and policy changesAccording to UBS, the American economy is anticipated to experience fluctuations characterized by a slower pace of expansion over the next three yearsNotably, as government spending support diminishes and real income growth slows, the economy is expected to decelerate further in 2025.

In the document, UBS asserts that throughout 2025, the U.S. economy will continue to oscillate in what they describe as a phase of slowing expansionIn 2023, the real GDP of the United States surged impressively, registering a growth rate of 3.2%. Employment figures also displayed robustness, with an average monthly addition of 216,000 jobsForecasts place the 2024 real GDP growth at 2.5%, with a projected monthly increase in employment numbers dropping to 168,000. The anticipated decline in economic dynamics indicates that 2025 will continue on this trend of deceleration, paving the way for a more pronounced effect from the new government’s fiscal policies in 2026.

A significant focus of the report is on the expected changes in fiscal policies by the incoming government, which are positioned to have more noteworthy implications for the economy in 2026 compared to 2025. Additionally, it's important to note that Federal Reserve Chair Jerome Powell had previously cautioned that the Federal Open Market Committee (FOMC) would respond to tariff changes in a manner that could be more intricate than initially anticipated.

As the report elaborates, inflation rates are projected to continue their downward trajectory through 2025. Coupled with labor market risks, this decline may trigger the Federal Reserve to consider reducing interest ratesIn the spring of last year, market analysts expected only a modest rate cut in 2024; however, the actual reduction enacted by the Federal Reserve reached a notable 100 basis points, illustrating the unpredictability of fiscal responses.

UBS did not shy away from discussing various sectors’ economic conditions

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The report highlights a lackluster performance from the business sector during the fourth quarter of 2024, with expectations of a rebound in the first quarter of 2025, although long-term predictions remain uncertainCapital expenditure intentions appear persistently low, and staffing plans continue to be underwhelmingUnless robust consumer demand and financial support materialize, business performance may weaken significantlyLooking ahead, rising uncertainties surrounding tax and trade policies could exacerbate these challenges.

Moreover, the risk of investment is curtailed by ongoing uncertaintiesHistorically, uncertainty has a tendency to dampen investment within the business sectorUnresolved decisions surrounding tax policies in Congress persist, and trade policy uncertainties loom large, contributing to a climate of hesitanceThere is even a possibility that due to time constraints, Congress may opt to extend tax laws for an additional year.

On the subject of the labor market, a deceleration is expected to align with the overarching economic trendsProjections for the latter half of 2024 indicate an average monthly increase of 165,000 jobs in the non-farm sector, with the private sector contributing about 129,000 jobs monthly—figures that are relatively unimpressive given the historical context of economic expansions in the U.SThe anticipated future trend suggests new non-farm job additions of about 150,000 per month and 120,000 in the private sector, although this includes a slight overestimation based on existing conditions.

Currently, the analysis of the labor market remains hindered by various measurement issuesYet, UBS contends that volatility within the labor market is likely to prompt the Federal Reserve to consider interest rate reductions.

While there may be potential for the U.S. economy to experience a boost in its long-term growth, numerous factors could contribute to a slow-downThe inflow of net international migrants in 2023 and 2024 could have a positive impact on potential GDP growth, but this momentum is expected to wane, especially as aging demographics place downward pressure on labor participation rates and, consequently, potential growth

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Since the first quarter of 2000, the annualized growth rate in productivity has been 1.8%, which is only marginally different from the 1.6% trend observed post-2003.

UBS’s perspective on inflation is equally pronounced, highlighting a challenging path aheadThe overall personal consumption expenditures inflation rate has diminished from over 7% to the Federal Reserve’s target level of 2%. Nevertheless, core inflation remains significantly above the desired benchmarkIt is anticipated that tariffs will induce a moderate increase in inflation rates by 2026, making their impact on interest rate decisions critically important.

Rent, a primary contributor to the failure of inflation levels to drop to 2%, may witness a slowdown in its escalation as vacancy rates rise and alternative rental market data growth tapers off.

With regard to fiscal policies, 2023 showcased a clear positive impact on economic growth; however, this influence is expected to weaken in 2024 and diminish further in 2025.

In terms of monetary policy, UBS expects the Federal Reserve to persist in adjusting interest rates towards a neutral level, hovering near 3.5% by the end of 2025. Should inflation decrease and labor market risks heighten, further interest rate cuts could be forthcoming, although such adjustments will be contingent upon a variety of unpredictable factors.

Concurrently, UBS highlights numerous potential risks to economic growth aheadThe U.S. economy could experience a soft landing that falls short of expectations, alongside stubborn inflation, slower-than-expected growth, and potential encroachment upon the zero-lower bound for interest ratesGiven the high level of policy uncertainty—factoring tariff implementations, tax policy changes, and Fed policies that rely heavily on fluctuating data—changes to immigration policies could further dampen population growth prospects, consequently affecting potential GDP growth and the overall economic "speed limit".

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