Is the US economy slowing? Our take

Last week reminded us that, in economics, making sense of the future is hard – and understanding the past isn’t always much easier.

The Bureau of Labour Statistics in the US released its monthly Non-farm Payrolls report – a measure of job creation in all sectors excluding the farming industry. It’s one of the most closely watched US macro indicators and a key input into discussions about interest rate policy.

The July report showed job creation in the month was slightly weaker than expected, but the real surprise was that the figures for May and June were revised downward quite sharply. The chart below shows the revised monthly figures compared to the original estimates from economists surveyed by Reuters.

This matters for a couple of reasons. First, it suggests that the US labour market wasn’t quite as strong as everyone had thought. You wouldn’t say it was in bad shape. Even after the revisions, the economy is still creating new jobs, the unemployment rate (see chart below) remains low and wage growth remains solid. But the labour market does seem to be slowing faster than we might have thought a week ago.

That brings us to interest rates. The labour market data is a key input for central bank policy decisions. Last week the Federal Reserve (Fed) left rates unchanged, by a 7-2 vote. In the US, it’s relatively rare to see dissenting votes on interest rate decisions – unlike in the UK, where they’re more common. A lot of the rationale for leaving rates unchanged was put down to uncertainty about the impact of tariffs on inflation. But an apparently resilient economy probably also played a role. 

If the Federal Open Market Committee – the group within the Fed that sets interest rates – had seen the revised labour market data, would they have come to a different conclusion? We can’t know, but we have seen that investors reacted by pricing in a much higher probability of a rate cut in September.

The labour market report wasn’t the only significant macro report from last week. We also saw a GDP report for the US for the second quarter – a key measure of economic growth. The headline figure was strong, showing 3% growth, but the trade figures are very noisy – thanks to trade policy.

Instead investors are focusing more on the growth in domestic demand. On this metric, we continue to see growth decelerate to 1.2% in the second quarter of 2025, as you can see in the chart below. 

On the other side, the outlook for inflation remains a bit unclear. There are lots of inflation metrics, but the basic message is pretty consistent. Inflation is still above the Central Banks 2% target, at somewhere between 2 and 3%, and might be accelerating a bit. Some of that could be down to tariffs pushing up prices, and that’s why most US central bankers voted to keep rates as they are.

Now, you could argue that tariffs represent a one-off increase in prices, and Central Bankers should look past that. It’s an argument that Fed Governor Waller made when he voted to cut rates at the last meeting, and Fed Chair Powell made a similar point back in March – prior to “Liberation Day”. 

All this seems to support the case for a rate cut in September. The labour market has been a bit weaker than we thought, and domestic demand is generally slowing. Inflation isn’t quite where the Fed would like it to be, and the uncertainty around tariffs hasn’t disappeared entirely, but we’d still expect at least a 25 bps cut next month. 

Let’s turn now to company earnings, again focusing on the US. While the macro environment may be quite uncertain, US corporates seem in pretty good shape. According to Factset data, of the S&P 500 companies that have reported so far, more than 80% have reported better than expected earnings, while 79% have reported better than expected revenues. That’s a higher proportion than we’ve seen historically and helps to explain the robust performance of equities in the second quarter. 

Digging into the details a bit more, it seems that tariffs have had less of an impact so far than many initially feared. The chart below illustrates the point, measuring the ratio of earnings upgrades compared to downgrades among analysts.

Estimates for the US (the dark line in the graph below) fell sharply in April in the wake of tariff announcements. After a period of negotiations and digestion, a number of companies have indicated that the impact of tariffs might be lower than initially feared, and that’s prompted earnings estimates to rise. 

The better-than-expected performance has raised some questions. Will tariffs prove less significant than feared? Is it still just a timing issue and we will only see the impact once the tariff regimes stabilise? And how much will companies absorb potentially higher costs from tariffs versus passing them onto customers?

On these points, the second quarter earnings highlight some interesting points – notably on corporate profitability. Based on the companies that have reported so far, margins in the second quarter have risen year-on-year, helping to drive double-digit earnings growth – so far.

But beneath the headlines we can see a broad range of sector performance. Three sectors have shown margin expansion (financials, tech and communications services) while seven sectors have reported declining margins (including staples, healthcare and energy). And that suggests that there is still some pressure to come, at least for parts of the economy.

Where does this leave us? In aggregate, US corporates continue to deliver despite all the policy uncertainty – and that has helped to drive equities higher. But the gains have been concentrated, notably among large tech and financial services businesses. And while earnings have generally come in better than expected, weaker margins suggest that some sectors are feeling the pressure from a slowing economy and, in some cases, an uncertain policy environment.