OECD Economic Outlook, Volume 2025 Issue 1

United States

Growth is expected to slow markedly to 1.6% in 2025 and 1.5% in 2026. This reflects the substantial increase in the effective tariff rate on imports and retaliation from some trading partners, high economic policy uncertainty, a significant slowdown in net immigration, and a sizeable reduction in the federal workforce. Annual headline inflation is set to pick up to 3.9% by end‑2025 due to higher import prices but is expected to ease throughout 2026, aided by moderate GDP growth and higher unemployment. Risks to the growth projection are skewed to the downside, including a more substantial slowing of economic activity in the face of policy uncertainty, greater-than-expected upward pressure on prices from tariff increases, and large financial market corrections.

Further easing of monetary policy will be warranted once inflation begins to abate and so long as inflation expectations remain well-anchored. Large budget deficits are expected for a sustained period, contributing to a high and rising government debt-to-GDP ratio. A significant fiscal adjustment will be required over several years. To ensure sustained growth and resilience, further efforts are needed to resolve trade tensions with international partners and reduce policy uncertainty.

The economic outlook has deteriorated

GDP grew at a robust pace of 2.8% in 2024, driven largely by private consumption and government spending, while further progress was made on disinflation. Although the advance estimate of GDP growth in the first quarter of 2025 was negative, this weakness likely reflected distortions from announced and anticipated actions on tariffs. Incoming hard data have generally indicated that the US economy began the year with considerable momentum. Final private demand remained resilient in the first quarter, monthly payroll growth averaged about 145 000 through the first four months of the year, and the unemployment rate remained low at 4.2%. By contrast, recent soft data indicators, such as surveys of consumer and business sentiment and inflation expectations, suggest a notable cooling of real GDP growth and a significant increase in inflation expectations. Measures of economic policy uncertainty have soared, and equity and bond markets have been characterised by elevated uncertainty and volatility. Meanwhile, inflation has proven sticky over recent quarters, with annual headline inflation remaining about 0.5 percentage point above the Federal Reserve’s target of 2% through the first quarter of 2025.

There has been a significant shift in US trade policy since February through a wide range of announcements regarding new tariffs and other trade restrictions, some of which have been reversed, delayed or modified, together with retaliation by some trading partners. A technical assumption is made that the tariffs prevailing as of mid-May will remain in place through the rest of 2025 and in 2026. Since the start of the year, the effective tariff rate on Chinese imports has risen by about 30%, while the effective tariff rate on other trading partners has risen to around 10%, on average. This represents an unprecedented increase in the average effective tariff rate, raising it from about 2.5% to above 15%, the highest rate since World War II. While the new tariffs may increase incentives to produce in the United States, higher import prices will reduce real incomes for consumers and raise the price of imported intermediate goods. Tariffs and policy uncertainty disrupt value chains and negatively affect investment. Border encounters between US Customs and Border Protection officials and illegal entrants to the United States, a proxy for net immigration, have fallen sharply over the past year from their previously elevated levels and are now well below pre-pandemic levels, when net immigration averaged about 1 million annually. Slower net immigration will contribute to lower growth in both supply and demand.

United States 1

1. Year-on-year percentage changes.

2. Personal Consumption Expenditures price index.

Source: OECD Economic Outlook 117 database; and U.S. Tax Foundation.

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United States: Demand, output and prices

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United States 2

Source: U.S. Customs and Border Protection; and OECD Economic Outlook 117 database.

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The large budget deficit will expand further, while monetary policy easing will be on hold this year

The budget deficit on a general government basis is expected to rise from around 7½ per cent of GDP in 2024 to over 8% in 2026, with the net debt-to-GDP ratio exceeding 100% by end-2026. New tariff revenues and spending cuts resulting from the shrinking of the federal workforce will be deficit-reducing. However, these effects will be more than offset by a slowing in revenue growth from weaker economic activity, as well as the expected enactment of a fiscal package for fiscal year 2026 and beyond that would extend the expiring provisions of the 2017 Tax Cuts and Jobs Act, make additional personal and corporate income tax cuts and boost spending on border security, while making further spending cuts, primarily related to health care. This fiscal package is responsible for most of the projected 0.6 percentage point of GDP rise in the deficit in 2026.

Monetary policy easing, which began in the third quarter of 2024, is likely to be on hold throughout 2025 given that inflation, already somewhat above target, is projected to move higher this year. The Federal Open Market Committee is expected to wait to see renewed progress towards its inflation mandate, even in a context of slowing growth. As long as inflation expectations remain well anchored, monetary policy easing should resume in 2026 with a cumulative 100 basis point cut in the policy rate, bringing it to 3¼-3½ per cent by end-2026.

GDP growth is set to slow and risks are skewed to the downside

Real GDP growth is expected to slow significantly from its 2024 pace. The substantial increase in the effective tariff rate on US imports and elevated policy uncertainty will dent household consumption and business investment growth. Both export and import growth will slow because of tighter trade policies and weaker demand, but the impact on imports will be greater than that on exports given the asymmetry in the change in tariffs, leading to a modest reduction in the current account deficit. With slower aggregate demand growth, the unemployment rate is projected to rise to 4.4% in early 2026, with the increase mitigated by the immigration slowdown. Annual headline inflation is expected to increase sharply to 3.9% by the end of 2025 as the tariffs are implemented and passed onto consumers. Inflation should then fall rapidly in 2026 as the upward impact of the tariff increases on the price level drops out and sluggish growth mitigates second-round effects.

Risks to growth are skewed to the downside. These include a more pronounced slowing of household consumption and investment due to elevated policy uncertainty and resulting financial market corrections. Monetary policy easing may be derailed should inflation expectations become de-anchored due to greater-than-expected upward pressure on prices, leading to higher interest rates than assumed. A key upside risk is that the tariff increases are unwound further. In addition, the economy could prove more resilient to the tariff shock than expected, especially if less of the tariff increase is passed on to the final consumer than is usually found to be the case. Deregulation of key sectors of the economy and new advances in artificial intelligence could also provide a boost to growth.

A resolution of trade tensions and a reduction in policy uncertainty are needed

To ensure sustained growth and resilience, it will be important to mitigate the disruption and uncertainty now prevailing. One key step is to resolve tensions with international trading partners. Any cuts to federal spending and the federal workforce should be well-targeted and not threaten the delivery of vital government services and research programmes. Reforms to immigration policy should be mindful of potential disruption in important sectors of the economy, such as construction and agriculture. The large structural budget deficit and rising debt ratio increase fiscal risks. A significant fiscal adjustment will be required over several years to help mitigate these risks, which would be supported by a solid medium-term fiscal framework. Strengthened competition policies and antitrust enforcement in concentrated industries with high prices, such as telecommunications, could also increase business investment, innovation, and overall economic growth. Other areas for improvement include simplifying the administrative and regulatory burden on business, as well as streamlining the licensing system for starting new firms. More generally, policymaking should be clear, predictable, and consistent to minimise the negative effects of policy uncertainty on economic activity and, in particular, on investment.