Executive Summary
The United States economy stands at a critical inflection point in late 2025, characterized by a widening bifurcation between surface-level resilience and deepening structural vulnerabilities. While third-quarter growth proved robust at approximately 3.9 percent, this mid-year momentum is giving way to a distinctly more subdued trajectory in the fourth quarter and beyond. The confluence of fiscal shock (federal shutdown), tariff-driven inflation persistence, and an accelerating labor-market deterioration—evidenced by dramatic benchmark revisions and recent private-sector job losses—has prompted the Federal Reserve into an accelerated and defensive easing cycle. This policy pivot presents policymakers with a complex and constrained environment. This analytical update synthesizes developments through October 2025, emphasizing the latest economic data, revised labor statistics, and tariff impacts that reshape the forward outlook significantly downward relative to mid-year expectations.
I. The Vanishing Mid-Cycle Momentum: From Q3 Strength to Q4 Stagnation
I.i. The Q3 Rebound: Magnitude, Composition, and Sustainability
Real GDP growth in the third quarter of 2025 reached 3.9 percent on an annualized basis, according to the Federal Reserve Bank of Atlanta's GDPNow model as of late October. This marks a decisive rebound from the mild contraction that characterized the opening quarter. The composition of this growth reveals both genuine sectoral strength and structural fragility concealed within headline figures.
Consumer spending anchored the recovery, benefiting from sustained nominal wage gains and favourable labor-market readings earlier in the year. However, this consumer resilience masks significant distributional stress: wealth effects from stock-market volatility have been highly concentrated, and real purchasing power has already begun to erode under tariff-driven goods inflation. Critically, private fixed investment—particularly in semiconductors, artificial intelligence infrastructure, and advanced data centers—provided the second pillar of growth. This AI-driven capex boom represents a genuine structural tailwind insulating the economy from broader cyclical weakness, yet it remains concentrated within a narrow band of technology-adjacent sectors.
What Q3 data obscures, however, is that this rebound was partially front-loaded and that underlying momentum deteriorated significantly as the quarter progressed.
I.ii. The October Shutdown and Q4 Fiscal Drag: Quantified Impact
The federal government shutdown that commenced on October , 2025, introduces a quantifiable and immediate economic headwind. Empirical estimates from historical precedent suggest that each week of shutdown subtracts approximately 0.1 to 0.2 percentage points from annualized quarterly GDP growth. With the shutdown extending through most of October and into early November, cumulative effects are estimated to range between 0.3 and 0.6 percentage points of Q4 annualized growth—a material dampening factor that effectively precludes the possibility of a second consecutive quarter of above-trend expansion.
The microeconomic consequences extend beyond the headline GDP arithmetic. Federal procurement activity has stalled, disrupting supply chains for contractors across advanced manufacturing, defense, and infrastructure sectors. Research and development activities at federal laboratories have been suspended, affecting the private firms dependent on government collaborative research.These supply-side frictions will create downstream effects extending well into Q1 2026, with procurement delays translating into delayed business investment decisions.
I.i. Tariff Shock as a Negative Supply Shock: The Price-Quantity Trade-Off
Beyond fiscal disruption, the tariff regime now in effect constitutes the primary headwind facing Q4 performance. The policy architecture has evolved significantly since mid-year: the Court of International Trade's August 29 decision finding the International Emergency Economic Powers Act (IEEPA) tariffs to be unlawful introduced substantial legal uncertainty, yet tariffs nominally remain in place pending appeals. The federal government collected $195 billion in customs duties in Fiscal Year 2025, more than 250% of what it collected in FY 2024, reflecting tariffs that have driven the effective tariff rate to levels unprecedented since the 1930s.
Analysis from the Federal Reserve Bank of St. Louis indicates that tariffs explain 10.9% of headline PCE annual inflation measured for the 12-month period ending August 2025. More granularly, in the short run before substitution, tariffs have generated a 1.3% price-level increase, with long-run post-substitution effects at 1.1%. The sectoral distribution of this inflation is highly uneven: metal prices have risen 9-40% in the short run, leather products 29%, apparel 28%, and motor vehicle prices have increased 9%, equivalent to approximately $4,500 added to the average new car price.
This tariff incidence poses a classical negative supply shock: it simultaneously depresses real output while elevating price levels, creating stagflationary pressures precisely when demand is already cooling. Consumer purchasing power erodes, dampening consumption growth in Q4. Businesses face margin compression as they struggle to pass through cost increases to price-sensitive consumers. The vacancy-to-unemployment ratio—which normalized sharply during 2025—further constrains wage-setting power, creating a vicious cycle in which tariff-induced cost inflation is absorbed through reduced hiring and investment.
II. The Unraveling of Labor-Market Momentum: From Scarcity to Slack in Real Time
II.i. Benchmark Revisions as a Reckoning: The 911,000 Job Deficit
The most alarming recent development is the revelation of systematic overestimation of labor-market strength throughout 2024 and early 2025. Annual revisions to nonfarm payrolls data for the year prior to March 2025 showed a downward adjustment of 911,000 jobs from initial estimates, reflecting updated information from the Quarterly Census of Employment and Wages. This revision is the largest since 2009 and substantially exceeds the consensus forecast range that had anticipated reductions between 600,000 and one million positions.
The sectoral composition of these downward revisions reveals the concentrated nature of recent weakness. The largest markdowns occurred in leisure and hospitality (-176,000), professional and business services (-158,000), and retail trade (-126,200). Critically, these downward revisions indicate that job creation has been inadequate relative to demographic change throughout 2025—meaning that the unemployment rate's apparent stability masked rising slack and declining wage pressures already before the recent acceleration in layoff announcements.
II.ii. The Collapse in Recent Hiring: September Losses and Ongoing Weakness
The deterioration became acute in September. According to private payroll processor ADP, US private-sector businesses lost 32,000 jobs in September, with August's previously estimated 54,000 payroll gains downwardly revised to negative 3,000.6 These figures represent the sharpest private-sector contraction outside pandemic crisis conditions since 2020, signalling a decisive inflection in hiring behavior.
In October, however, ADP reported that the US labor market showed signs of bouncing back, with average weekly employment increases of 14,250 over the four-week period ended October 11.7 This "tepid recovery" suggests that the September collapse may have represented a temporary shock rather than an incipient free-fall, yet the level of October job creation remains historically weak relative to demographic requirements.
The absence of the official September jobs report due to the government shutdown has left a critical data vacuum. The Dow Jones consensus forecast had anticipated 51,000 nonfarm payroll gains in September with the unemployment rate holding at 4.3%, yet high-frequency data from ADP, job posting indices, and state-level initial jobless claims all pointed to conditions materially weaker than that forecast.
II.iii. Labor-Market Slack Expands Across Multiple Dimensions
Beyond headline employment figures, broader indicators reveal rapidly expanding slack across the labor market. In August, the hiring rate (hires as a percentage of total employment) fell to 3.2%, matching the lowest rate since 2013. This represents a sharp deterioration from the elevated hiring rates characteristic of 2024 and suggests that businesses have grown cautious about expanding headcount.
Long-term unemployment is beginning to rise. The average monthly unemployment rate for new college graduates in the first half of 2025 was 5.3 percent, up from 4.1 percent in the first half of 2022 and higher than the 4 percent rate for all workers. This bifurcation—whereby new entrants face substantially elevated jobless rates even as the aggregate unemployment rate remains moderate—signals that labor-market cooling is selective, penalizing those with the least bargaining power while insulating incumbent workers temporarily.
Additionally, continuing jobless claims have risen to levels not seen in four years, with the share of unemployed workers engaged in long-duration unemployment spells (27+ weeks) reaching its highest level outside the pandemic period since mid-2016. This deterioration in labor-market churn dynamics is particularly concerning because it suggests that a portion of recent joblessness may become entrenched, reducing labor-force attachment and creating future headwinds to growth.
II.iv. Demographic Tailwinds Obscure the Structural Weakening
A critical analytical point: the unemployment rate's apparent stability masks deteriorating underlying labor-market fundamentals. The natural rate of job creation required to maintain unemployment rates steady has fallen materially, reflecting immigration changes, demographic aging, and labor-force participation adjustments. The Treasury Department noted that over the 11-month period ending in March 2025, the unemployment rate fluctuated within a narrow range of 4.0 to 4.2 percent, averaging 4.1 percent for two quarters, near Congressional Budget Office estimates of the non-cyclical unemployment rate consistent with stable inflation. Yet this apparent equilibrium masks that demographics are exerting downward pressure on labor-force growth, making it easier for unemployment to remain stable even as underlying job creation weakens.
III. The Intractable Inflation Problem: Tariffs as Structural Constraint
III.i. The Tariff Channel: Magnitude and Persistence
Core Personal Consumption Expenditures (PCE) inflation remains stubbornly elevated at approximately 3.0 percent year-over-year, well above the Federal Reserve's 2 percent target. Critically, this inflation is overwhelmingly attributable to trade policy rather than excess demand. The tariff regime has effectively increased the average effective tariff rate (AETR) to historically extraordinary levels.
The current statutory average tariff rate is the highest since the early-1930s, with the AETR rising from a baseline 2.2 percent to as high as 12-14 percent in mid-2025. The tariffs imposed as of September 1 reduce long-run US GDP by approximately 0.6 percent as a direct effect, with threatened and imposed retaliatory tariffs adding an additional 0.2 percent GDP reduction.
The fiscal impact of tariffs further constrains policy optionality. While tariffs have generated substantial short-term revenue—the 195 billion dollars collected in fiscal 2025—this revenue source faces legal jeopardy. If the Supreme Court affirms lower court decisions that the IEEPA tariffs are unlawful, projected net new revenue from tariff policies will fall from approximately 2.3 trillion over the 2025-2035 period to just 900 billion under conventional scoring.
III.ii. The Partial Pass-Through Puzzle and Future Wage Pressures
One of the more subtle aspects of tariff-driven inflation is the incomplete and lagged pass-through of import costs to consumer prices. Evidence through June 2025 indicates that foreign producers have absorbed little, if any, of the tariff burden—consistent with prior research showing that U.S. importers typically shoulder the initial incidence. This implies that domestic firms have thus far been compressing margins or delaying price adjustments, and that the full inflationary impact has not yet been reflected in consumer prices. As these temporary buffers erode and the tariff regime becomes fully embedded in pricing decisions, inflation is likely to remain elevated and could even accelerate.
In other words, firms have initially absorbed tariff costs through margin compression, a strategy that is unsustainable over longer horizons. As firms exhaust margin capacity and consumer demand begins to deteriorate, the path of least resistance will be to raise prices further or reduce hiring and investment. Either outcome creates secondary inflation pressures or labor-market weakness—both of which complicate the Fed's policy problem.
III.iii. Services Inflation: The Wage-Expectations Anchor
One bright spot in the inflation picture is moderating services-sector inflation, reflecting cooling labor-market conditions and declining quits. This is precisely the channel through which Fed policy traditionally operates. However, the goods-inflation problem—driven by tariffs rather than demand—proves largely intractable to monetary tightening. This creates an asymmetry: monetary policy easing (justified by labor-market weakness) will not durably reduce goods inflation driven by trade policy; conversely, maintaining restrictive policy will deepen labor-market deterioration without moving the tariff-driven inflation needle.
IV. Monetary Policy in Constrained Circumstances: The Accelerated Defensive Easing Cycle
IV.i. The Accelerated Pivot: Forced by Weakening Fundamentals
The Federal Reserve has decisively pivoted to an aggressive easing path. In September 2025, the FOMC surprised markets with a 50 basis point cut to the target range for the federal funds rate, followed by a further 25 basis point reduction on October 29, 2025, bringing the target range to 3.75%–4.00%.This rapid $75$ basis point reduction in two months marks a decisive shift from the restrictive stance and represents a forced response to mounting evidence of labor-market deterioration and deteriorating macro fundamentals.
Fed Chair Jerome Powell noted that the labor market is "cooling off," effectively acknowledging that the tightening cycle that commenced in March 2022 had achieved its intended effect on employment dynamics—albeit with a substantial lag between policy action and realized effects. The speed and size of the cuts signal the Fed's concern that the underlying pace of economic deceleration is materially faster than previously believed.
IV.ii. Further Cuts Priced In: Market Expectations vs. Policy Optionality
Market pricing now reflects expectations of potentially two to three additional 25 basis point cuts by early 2026, which would bring the federal funds rate to the 3.25-3.50 percent range. This aggressive reduction provides substantially more accommodation to credit-sensitive sectors (particularly housing and lower-credit-quality commercial borrowers) than anticipated mid-year. However, the magnitude of relief is limited by persistent inflation expectations.
Even after the October cut, the real federal funds rate—defined as the nominal rate minus core PCE inflation expectations—remains positive, though it is closer to the estimated neutral rate of approximately 2.0-2.5 percent. This suggests that monetary policy is quickly moving from a restrictive mode to a more neutral/accommodative mode, reflecting the dual policy pressure of labor-market weakness and tariff-driven inflation that monetary policy cannot readily address.
IV.iii. Policy Uncertainty and Data Deficits: The Government Shutdown Complication
The federal government shutdown has created substantial information asymmetries and policy constraints for the Fed. Due to the government shutdown, releases of The Conference Board Employment Trends Index, the Lightcast Help Wanted OnLine Index, and other leading economic indicators have been delayed. This creates the perverse situation in which policymakers must conduct monetary policy amid heightened economic uncertainty while simultaneously lacking the data typically employed to resolve that uncertainty.
The Fed faces a genuine conundrum: easing monetary policy at such an aggressive pace into a context of elevated inflation (even if tariff-driven) risks further destabilizing inflation expectations, particularly if market participants begin to worry about fiscal dominance or credibility loss. Conversely, maintaining a restrictive pause in the face of a visibly weakening labor market risks a sharper contraction in economic activity and employment. The choice to cut 75 basis points in two months indicates the Fed is prioritizing the risks of a sharp labor-market contraction over the risks of momentarily higher tariff-driven inflation.
V. The 2026 Outlook: A Precarious Managed Deceleration
V.i. Growth Prospects Within a Widening Cone of Uncertainty
Consensus forecasters have projected real GDP growth for 2026 in a wide range of 1.1 to 2.3 percent. Deloitte's baseline forecast anticipates growth of 1.4% in 2026 from 1.8% in 2025, with growth expected to rebound above 2% in 2027. However, this baseline is predicated on tariff levels remaining relatively stable and on immigration continuing at roughly historical rates.
Alternative scenarios paint a more pessimistic picture. Under a more adverse scenario incorporating higher tariffs (averaging 20%), zero net migration from 2026 onward, and a Fed policy error, the model generates a recession entering Q4 2026, with unemployment averaging 5% in 2027 and output not returning to previous highs until Q1 2028.
V.ii. Structural Headwinds Pressing Growth Toward the Lower Bound
Multiple durable factors weigh on the upside growth scenario. First, the shutdown's procyclical effects will carry forward: research suspensions, procurement delays, and lost output will spill into early 2026, creating a multi-quarter growth drag. Second, the tariff burden remains elevated, and the legal status of tariffs remains uncertain, creating ongoing policy-uncertainty penalties to business investment. Third, global fragmentation and retaliatory measures threaten export competitiveness. Finally, even with the Federal Reserve's accelerated rate cuts, the structural problem of tariff-driven inflation persistence limits the efficacy of policy.
V.iii. Strategic Tailwinds: AI Capex and Housing Stabilization
Offsetting these headwinds are powerful structural developments. The artificial intelligence capital-expenditure super-cycle—encompassing semiconductor fabrication, advanced computing hardware, data-center construction, and electricity generation infrastructure—provides a durable investment floor that could support growth even amid broader economic deceleration. In the baseline scenario, business investment in AI remains strong despite headwinds from other areas of the economy, partially offsetting weakness elsewhere.
Additionally, housing market stabilization could emerge as a modest growth contributor in 2026 if the Fed's aggressive cuts translate into significantly lower mortgage rates. The housing sector has been a persistent drag on economic activity through 2025, but as rates decline, the refinancing wave could unlock pent-up demand from households unable to transact at prevailing rates in 2024-2025.
VI. Inflation Persistence: A Structural, Policy-Driven Reality
VI.i. The 2.9-3.3 Percent Core Inflation Baseline for 2026
Professional forecasters, central banks, and private-sector economists generally project core PCE inflation in the range of 2.9 to 3.3 percent for 2026, well above the Federal Reserve's 2 percent target. Critically, this inflation is overwhelmingly driven by trade policy rather than excess aggregate demand. The fundamental issue is that tariffs represent an exogenous supply shock—raising goods prices regardless of monetary policy settings—while services inflation is moderating as labor-market slack expands.
This creates a profound policy dilemma: the Fed is being asked to ease monetary policy (to support employment) despite an inflation rate structurally anchored above target. If this inflation persists while unemployment rises, the result could be described as "stagflation-lite"—an economically damaging combination of modest growth, elevated inflation, and declining labor-market opportunities.
VI.ii. The Real Disposable Income Squeeze
Higher tariffs are expected to weigh on real GDP growth in late 2025 and early 2026, with consumers bearing the brunt of higher prices and the largest impacts projected in Q4 2025 through Q3 2026.17 Real disposable income—the true constraint on consumption—is being compressed simultaneously by slowing nominal income growth (as hiring weakens) and accelerating inflation in essentials.
This dynamic differs qualitatively from the post-pandemic experience, when excess demand created inflation but also generated robust nominal wage growth. In the current regime, inflation is being driven by an external shock (tariffs) rather than tight labor markets, meaning that nominal wage growth is decelerating even as inflation remains elevated. This is an unambiguously negative development for household finances and consumption durability.
VII. Labor-Market and Demographic Structural Challenges
VII.i. From Scarcity to Slack: Unemployment Trajectory Through 2026
The Survey of Professional Forecasters projects the unemployment rate at an annual average of 4.2 percent in 2025 and 4.5 percent in 2026. While 4.5 percent remains below levels that would typically be considered recessionary, this represents a clear inflection from the 3.4-3.5 percent lows of 2023 and the 4.0-4.2 percent range that characterized most of 2024.
Critically, this transition from tight to normal labor-market conditions introduces downside risk for consumption, historically the engine of US growth. As unemployment rises and job-finding durations lengthen, household confidence will likely deteriorate, dampening willingness to spend from accumulated savings or to access credit.
VII.ii. Demographic Headwinds: The Immigration and Participation Story
Underlying labor-market dynamics are being shaped by demographic shifts that constrain potential growth. Immigration flows have declined materially from the levels of 2022-2023, and policy uncertainty surrounding deportations and visa levels has created ambiguity around future labor-supply growth. Deloitte's baseline forecast assumes net migration of 3.3 million adults over 2025-2030, compared to Congressional Budget Office anticipations of 6.8 million, putting substantial downward pressure on growth as there are fewer workers in the country to contribute to economic output.
This demographic constraint operates directly through reduced labor-supply growth but also indirectly through its effects on housing demand, consumer spending, and fiscal sustainability. An aging population with declining worker-to-beneficiary ratios will exert upward pressure on government transfer programs precisely when fiscal constraints are already acute.
VIII. Fiscal Fragility: The Long-Structural Shadow
VIII.i. The 2025 Deficit and 2026 Trajectory
The Congressional Budget Office projects the federal budget deficit in fiscal year 2025 at 1.9 trillion dollars, with federal debt rising to 118 percent of GDP in 2035. Even after accounting for tariff revenues and the transitory effects of the "One Big Beautiful Bill Act" tax cuts, the structural deficit remains alarmingly large.
Looking forward, federal revenues decline as a share of GDP over the next two years to 17.9 percent in 2029, before rising to 18.3 percent in 2035. Yet spending is projected to rise steadily, driven by automatic escalators in Social Security and Medicare alongside discretionary increases in defense spending.
VIII.ii. Net Interest Payments and the Fiscal Dominance Risk
The most troubling aspect of the fiscal trajectory is the explosion in net interest payments. Interest costs have now become the second-largest federal spending category, surpassing many core government functions. As nominal interest rates remain elevated and the debt stock grows, interest payments will continue to consume an ever-larger share of the budget, crowding out productive investments and constraining policy flexibility.
This creates a durable fiscal constraint that threatens long-term sovereign credibility, reduces policy flexibility in the event of future shocks, and complicates future monetary interventions by increasing the risk of a fiscal-dominance environment in which the Federal Reserve faces pressure to monetize government debt to avoid unsustainable debt trajectories.
VIII.iii. Long-Term Debt Dynamics and Sustainability Questions
Under current law projections, federal debt rises to 118 percent of GDP by 2035, with no credible medium-term consolidation plan articulated. This trajectory is fundamentally unsustainable. While advanced economies can sustain elevated debt-to-GDP ratios for extended periods, the current trajectory combines rising deficits with deteriorating demographics—the inverse of what fiscal sustainability requires.
The political economy of fiscal adjustment has proven intractable, with entitlement reform and tax increases both proving resistant to legislative action. This suggests that the eventual fiscal correction may be disorderly—involving either sudden spending cuts, inflation (eroding real debt), or a combination of both—rather than the smooth, planned adjustment that would minimize economic disruption.
IX. Financial Markets and the Fragility of the Soft-Landing Consensus
IX.i. Why Markets Remain Optimistic: The Three Pillars
The stock market's remarkable resilience through 2025—recovering quickly from tariff-induced volatility in April and August—rests on three somewhat fragile pillars. First, monetary accommodation: investors have priced in a sustained and aggressive easing cycle through 2026, providing ongoing liquidity support to equity valuations. Second, technological exceptionalism: AI-related firms anchor market expectations, projecting durable earnings expansion even as broader economic growth cools. Third, the assumption that the Federal Reserve will successfully engineer a "soft landing" without allowing unemployment to rise materially or allowing growth to decelerate into recession.
IX.ii. Valuation Concentration Risk and Tariff Spillover Risks
However, downside risks are substantial and asymmetrically skewed. The valuation concentration risk is particularly acute: with AI-related firms trading at multiples significantly above historical precedent, any disappointment in earnings trajectories or implementation timelines could trigger broad-based corrections. Similarly, tariff escalation—whether through further policy tightening or through retaliation spirals—could rapidly compress corporate margins and undermine the earnings growth assumptions embedded in current valuations.
Long-run sectoral analysis suggests that tariffs will expand US manufacturing output by 2.5%, but these gains are more than crowded out by other sectors: construction output contracts by 3.8% and agriculture declines by 0.3%. This pattern indicates that equity-market concentration risk extends beyond the technology sector: construction and consumer-discretionary firms are exposed to tariff-induced margin compression and demand destruction.
IX.iii. Soft Landing Still Most Likely, But Increasingly Fragile
The base-case scenario still points to a managed deceleration in 2026—marked by slower output growth relative to 2024–2025 but stopping short of a recession. This trajectory would be underpinned by the Federal Reserve’s aggressive pivot toward monetary easing, continued AI-driven capital expenditure in high-productivity sectors, and an eventual stabilization in residential construction as mortgage rates drift lower. Yet the margin for error has narrowed significantly. The confluence of heightened fiscal fragility following the autumn budget deadlock, persistent inflation pressures complicated by tariff-related cost pass-through, and a more visible deterioration in labor-market fundamentals—alongside unresolved trade uncertainty with Canada and other partners—creates multiple vectors through which the downside scenario could assert itself.
The distribution of outcomes is no longer symmetric around a soft landing; rather, downside risks (recession, policy error, fiscal shock) have become more probable than upside scenarios (rapid disinflation, AI-productivity miracle, fiscal consolidation).
X. Conclusion: A Constrained and Fragile Equilibrium
The US economy at end-October 2025 presents a paradox: headline growth remained solid in Q3, yet underneath this surface resilience, structural fault lines are widening. The labor market has deteriorated far more than headline unemployment rates suggest, with benchmark revisions revealing that job creation has been inadequate for nearly 18 months. Inflation persists at levels well above target, but it is driven by trade policy rather than demand—making it largely impervious to monetary policy while constraining real incomes. Fiscal imbalances have reached levels that threaten long-term sustainability, yet the political economy of adjustment remains paralyzed.
The Federal Reserve has rightly begun an accelerated easing cycle, but it operates from a position of constrained optionality: tariff-driven inflation limits downside room for policy rates, while labor-market weakness demands accommodation. The rapid 75 basis point reduction in the federal funds rate to 3.75%–4.00% signals that policymakers are prioritizing employment stability over the structural inflation problem. Policymakers face a genuine policy trilemma: maintaining price stability, supporting employment, and preserving fiscal credibility are increasingly difficult to achieve simultaneously.
The 2026 outlook remains weighted toward a managed deceleration—slower growth, gradual labor-market cooling, and persistence of above-target inflation. Yet the fragility of this baseline has increased materially. Growth of 1.5 to 2.0 percent is achievable if tariff policies stabilize, immigration continues, and AI-driven investment sustains momentum. Growth below 1.0 percent, with unemployment rising above 5.0 percent, becomes increasingly plausible if tariff escalation occurs, immigration restrictions tighten further, or the Fed's aggressive easing fails to prevent a sharp labor-market contraction. The middle-of-the-road soft-landing scenario remains more probable than either a roaring recovery or a sharp recession, but the probability mass has shifted materially toward the tails of the distribution.
Investors and policymakers must prepare for a period of heightened uncertainty, constrained policy flexibility, and potentially material volatility across asset classes—particularly if tariff escalation, immigration policy shocks, or Fed policy errors disturb what remains a delicate macroeconomic equilibrium.
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