Economists Are More Optimistic About Growth in the U.S.

People shop in a discount supermarket in Union, New Jersey, in September. (CHARLY TRIBALLEAU/AFP via Getty Images)

Key Points

• Economists have revised growth expectations upward for 2025 to 1.8% and for 2026 to 1.7%, an increase from 1.3% in the prior survey.
• The personal consumption expenditures price index is projected to reach 3% by year-end, then decrease to 2.5% in 2026, exceeding the Fed’s 2% target, according to the National Association of Business Economics.
• The improved economic outlook is considered fragile, with potential risks from fluctuating trade policies, low hiring, and elevated consumer inflation expectations.

The economic outlook has shifted considerably from earlier this year, with economists penciling in more growth and less inflation than previously expected.

In the wake of the aggressive tariffs announced in early April, economists across the country slashed expectations for growth and raised their forecasts of inflation considerably. But with consumers continuing to spend, in the aggregate, and uncertainty around trade policy starting to fade, there is more optimism that the U.S. economic engine will keep powering ahead.

Many economists forecast that the U.S. economy would shrink in the third quarter and that results for the fourth quarter would be below trend. That made sense because growth in the first quarter was dismal and the effective tariff rate was expected to exceed 20% this year.

But nearly seven months later, that grim scenario doesn’t look like it will come to pass. Instead, while the job market has continued to weaken, inflation hasn’t surged dramatically and second-quarter economic growth far surpassed expectations.

In large part, that is due to the fact that the effects of higher tariffs on the economy have been delayed. That is allowing the economy to benefit for longer from factors such as lower energy costs, weakening wage growth in the service-sector economy, and softer housing inflation, says James Knightley, chief international economist at ING.

“We went through obviously a bit of a shock, but we do seem to be stabilizing now,” Knightley said.

Those shifting dynamics have generated more optimism among most economists, who have increased their expectations for growth for the second half of the year. On Monday, the National Association of Business Economics released its October 2025 Outlook, a consensus macroeconomic call from a panel of 40 professional economists, raising its forecast of economic growth this year and next. It also calls for continued elevated inflation, though a more muted upswing than previously expected.

The latest projections reveal a “moderate path” for the U.S. economy, an improvement relative to the last couple of surveys, Greg Daco, NABE vice president and chief economist at EY, said Monday.

“There has been more growth than initially anticipated, but we’re anticipating slower growth,” Daco said. Still, most see expansion ahead. Only 10% of economists surveyed expect an imminent downturn.

Inflation-adjusted growth in gross domestic product is now expected to be 1.8% in 2025, up from 1.3% in the last survey in June. Next year, the expectation is that the U.S. economy will grow 1.7%. Those numbers compare with real GDP growth of 2.8% in 2024 and 1.6% in the first half of 2025.

The outlook predicts the Fed’s preferred inflation gauge, the personal consumption expenditures price index, will hit 3% by the end of the year before falling to 2.5% in 2026. In August, PCE inflation was 2.7%.

“While inflation is projected to cool to 2.5% by the end of 2026, this still exceeds the Fed’s 2% target” of 2%, writes Kathy Bostjancic, chief economist at Nationwide and the survey chair for the NABE Outlook.

This is a similar outlook to a recently revised call published by the Peterson Institute for International Economics. Karen Dynan, nonresident senior fellow at the Peterson Institute, said in delivering the organization’s updated forecast that she expects that real GDP will grow a touch faster, at 1.9% for this year. But she also predicted that economic growth will measure 1.7% in 2026.

Growth may be uneven in the coming months and years, and demand is likely to slow next year, Dynan said. “With so much business investment and consumer spending dependent on exuberance about AI, any disappointments could sap the current economic momentum and expose the negative impact of tariffs, immigration restrictions, and other policies,” she said.

The Peterson Institute similarly forecast that PCE inflation will hit 3% this year, but has a gloomier forecast than NABE for 2026. It expects inflation will worsen to 3.3% next year.

“Tariffs, now at their highest levels in 90 years, are contributing to a modest pickup in goods price inflation, though the effect on overall inflation has been largely masked by a decline in shelter inflation,” Dynan writes.

She and others also warn that the improved outlook is uncertain, particularly if trade policies continue to fluctuate, hiring remains low, and expectations for inflation among consumers remain elevated. “I wouldn’t say these are certain times,” Martin Holdrich, senior economist at Woods & Poole Economics, said Monday in discussing NABE’s latest outlook.

In other words, the U.S. economy is in a fragile balance, but that could easily shift.

Write to Megan Leonhardt at megan.leonhardt@barrons.com