Market Analysis From Shawn DuBravac, Global Electronics Association Chief Economist

In 2025, real personal consumption expenditures (PCE) have shown clear signs of weakening. After growing just 0.5% (annualized) in Q1, real PCE rebounded modestly to 1.4% in Q2, indicating soft consumer momentum. Much of this growth has been concentrated in services, while goods spending has stagnated or declined. On a monthly basis, real PCE was nearly flat in both May and June, with a 0.1% rise in June barely reversing May’s drop. Overall, consumer demand has slowed notably compared to 2024, reflecting the combined weight of inflation, higher borrowing costs, and tariff-driven price increases.

Inflation is beginning to reflect the tariff shock. Core PCE rose to 2.8% year-over-year in June, marking the third consecutive monthly increase. Most of the upward pressure came from goods categories either directly subject to tariffs or affected indirectly through global supply chains. According to Yale’s Budget Lab, the average U.S. statutory tariff rate is set to reach 18.2%, its highest level since the 1930s, once the August 7 tranche is implemented. Historically, inflationary pass-through tends to peak 6 to 9 months after duties are enacted. If that pattern holds, the most significant inflationary drag will land during the critical holiday season, just as households face tighter budgets.

Job growth is also slowing and becoming increasingly concentrated. The July payroll report showed a gain of just 73,000 jobs, the weakest since the pandemic recovery, while the unemployment rate ticked up to 4.2%. Over the past three months, average monthly job gains have slumped to just 35,000. Hiring remains strong in health care and government, but manufacturing, transportation, and other cyclical sectors are now shedding jobs. While layoffs remain low, employers appear to be pausing hiring, a classic late-cycle signal.

The Federal Reserve is in a bind. The Fed has held its policy rate between 4.25% and 4.50%, caught between persistent inflation and weakening labor market data. Policymakers insist cuts are unlikely until there is clear evidence of slack, rising unemployment, and outright job losses. With core PCE at 2.8% and tariff pressures building, the room for easing is limited. Markets are currently pricing in a 75% to 80% chance of a rate cut by September following the soft jobs report, but Fed officials such as San Francisco’s Mary Daly have warned against acting prematurely, arguing that early cuts risk re-anchoring inflation expectations.

There is a narrow Path to avoid contraction. The U.S. economy is teetering on a knife’s edge as it approaches 2026. Avoiding contraction remains possible but will require a precisely calibrated policy response. First, inflation must cool decisively. That means containing tariff pass-through and bringing core PCE below 2.5%, enabling the Fed to cut rates without jeopardizing credibility. If unemployment moves sharply higher, the Fed may have scope to cut more aggressively. This policy mix could sustain soft-landing conditions, but it demands timing, coordination, and a delicate balance.

The risk of a hard landing is intensifying. A scenario in which tariffs escalate further could provoke retaliatory trade barriers, disrupting exports and global supply chains. Inflation would remain sticky, particularly as input costs rise across imported goods, constraining the Fed’s ability to respond even as growth falters. In this setting, stagflation becomes the most acute macroeconomic threat, a combination of elevated inflation, rising unemployment, and declining output.

Bottom line, the U.S. economy faces a narrowing window to engineer a soft landing. The illusion of Q2 strength is already fading, replaced by mounting evidence of stagnation. Without a meaningful reversal in trade policy or timely fiscal support, the baseline scenario is shifting from a slowdown toward a mild recession by early 2026.