The US economy is currently experiencing significant challenges. Despite these challenges, it has performed surprisingly well given the high uncertainty regarding tariff policies, and also actually higher tariffs. However, we expect what we call a mild stagflationary episode, in which meager economic growth and somewhat elevated inflation will occur together.

Due to the shutdown in the U.S., we currently have no data on economic growth in the third quarter of 2025. The available data published before the shutdown suggests solid growth, although growth is likely to be lower than in the second quarter. The shutdown will negatively impact economic development in the fourth quarter. In any case, only minimal growth was expected for this quarter. We now anticipate stagnation in the fourth quarter. The US economy remains robust, but currently relies heavily on AI-driven investments and affluent households who continue to consume.

In the second quarter of 2025, the economy still expanded by 0.9 percent (3.8 percent annualized). Private consumption rose robustly (+0.6 percent), while private investment expanded at a high rate (+1.8 percent). Inventories decreased at the same time as imports significantly dropped. This is due to the fact that, ahead of the higher tariffs adopted in spring, imports surged, leading to temporarily higher inventories. This was reversed in the second quarter. Public consumption was flat in the second quarter of 2025.

Clear signs of weakness now appear. As labor market data show, net job growth was very low. Official data from the Bureau of Labor Statistics are only available up to August. In the summer months, only 88,000 new jobs were created. Most of these gains came from the health care sector. The manufacturing sector continued to lose jobs. During the shutdown, the private alternative from the ADP Research Institute provides data for the US labor market in September and October. These data point to a continued weak labor market. However, it is important to note that population growth has slowed due to new immigration/emigration policies. The breakeven rate of monthly payroll growth needed to keep up with the labor force has considerably fallen from roughly 165,000 jobs in early 2024 to approximately 85,000 jobs (according to Kolko, 2025) or even only 30,000 jobs (according to the Dallas Fed). Discussions about the independence of the Fed and statistical agencies further contribute to uncertainty and a less optimistic outlook for the US economy.

Tariffs have dramatically increased in the past months, and there is still very high uncertainty regarding the further evolution of tariffs. The Yale Budget Lab estimates that the effective average tariff rate is now at approximately 18 percent, the highest tariff rate since the 1930s. In the coming months, inflation will be increasingly affected by these higher tariffs. Weaker demand may somewhat dampen inflationary pressures. Nevertheless, a stagflationary scenario for the US economy is a risk to consider. This puts the Fed into a dilemma. A weaker economy calls for interest rate cuts, while inflation persistently exceeds the Fed target and may further increase again in the wake of tariffs.

We anticipate a mild stagflationary episode in which meager economic growth and somewhat elevated inflation will occur together next winter. In our baseline scenario, the economy will experience stagnation but not fall into a recession. Inflation will first increase in the remaining months of 2025. However, we think inflation will gradually decline in 2026 since the tariff shocks coincide with weak demand and still elevated interest rates. Expansionary fiscal policy and interest rate cuts will help the economy become somewhat more dynamic in 2026, mainly in the second half of 2026. We currently expect one more interest rate cut in 2025.

Average annual GDP growth will be modest in 2025 and 2026, with growth rates of 1.7% and 1.2%. We expect no recession in our baseline scenario, though the economy will stagnate for approximately three quarters before becoming more dynamic in 2027, achieving 1.8% growth. The unemployment rate will moderately increase in the coming months. Inflation will stay elevated in 2025 and 2026 before approaching the 2% inflation target.

Highly recommended!

“Knowledge, technology, and growth: Joel Mokyr, Nobel laureate” by Ran Abramitzky and Mauricio Drelichman.

“One core message of this extensive body of research is particularly timely: economic progress is critically dependent on open intellectual inquiry, on the free exchange of ideas, and on a vigorous defence of scientific principles.”

Highly interesting (and potentially controversial) food for thought!

“Factories of Ideas? Big Business and the Golden Age of American Innovation” by Pier Paolo Creanza.

“This paper studies the Great Merger Wave (GMW) of 1895–1904—the largest consolidation event in U.S. history—to identify how Big Business affected American innovation. Between 1880 and 1940, the U.S. experienced a golden age of breakthrough discoveries in chemistry, electronics, and telecommunications that established its technological leadership. Using newly constructed data linking firms, patents, and inventors, I show that consolidation substantially increased innovation. …Overall, the GMW increased breakthroughs by 13% between 1905 and 1940, with the largest gains in science-based fields (30% increase).”

Very valuable!

“Evolving Practices in Public Investment Management“

“Since 2008, the Bank for International Settlements and the World Bank have organised – jointly with cosponsoring central banks – the Public Investors Conference to discuss policy issues, quantitative methods and current challenges for central banks, sovereign wealth funds and public pension plans.”

“The Conference Proceedings is a publication that contains peer-reviewed papers by prominent academics and professionals on topics related to portfolio allocation and risk management for central banks, sovereign wealth funds and public pension plans, including sustainability issues and artificial intelligence developments.”

This book looks thought-provoking (irrespective of whether you agree or disagree with the conclusions)!

“The Great Global Transformation” by Branko Milanovic.

“Drawing on original research, leading economist Branko Milanovic reveals the seismic shifts that are shaping our world. He details the facts: how the rising economic power of Asia is creating a new global ‘middle class’ in the greatest reshuffle of incomes since the Industrial Revolution. He explores our fears: why are we becoming increasingly unhappy, when the world is becoming richer and more equal?”

The US economy is currently experiencing significant challenges. Despite these challenges, it has performed surprisingly well if one considers the high uncertainty regarding tariff policies, and also actually higher tariffs. However, we expect what we call a mild stagflationary episode in which meager economic growth and somewhat elevated inflation will occur together.

Clear signs of weakness now appear. As labor market data show, net job growth was very low in the past three months. Only 88,000 new jobs were created. Most of these gains came from the health care sector. The manufacturing sector continued to lose jobs. Overall, the labor market is cooling. However, it is important to note that population growth has slowed due to new immigration/emigration policies. The breakeven rate of monthly payroll growth needed to keep up with the labor force has probably fallen from roughly 165,000 jobs in early 2024 to approximately 85,000 jobs in June 2025 (see Kolko, 2025). Discussions about the independence of the Fed and statistical agencies further contribute to uncertainty and a less optimistic outlook for the US economy.

In the second quarter of 2025, the economy still expanded by 0.9 percent (3.8 percent annualized). Private consumption rose robustely (+0.6 percent), while private investment expanded at a high rate (+1.8 percent). Inventories decreased at the same time as imports significantly dropped. This is due to the fact that, ahead of the higher tariffs adopted in spring, imports surged, leading to temporarily higher inventories. This was reversed in the second quarter. Public consumption was flat in the second quarter of 2025.

Tariffs have dramatically increased in the past months, and there is still very high uncertainty regarding the further evolution of tariffs. The Yale Budget Lab estimates that the effective average tariff rate is now at approximately 18 percent, the highest tariff rate since the 1930s. In the coming months, inflation will be increasingly affected by these higher tariffs. Weaker demand may somewhat dampen inflationary pressures. Nevertheless, a stagflationary scenario for the US economy is a risk to consider. This puts the Fed into a dilemma. A weaker economy calls for interest rate cuts, while inflation persistently exceeds the Fed target and may further increase again in the wake of tariffs.

We anticipate a mild stagflationary episode in which meager economic growth and somewhat elevated inflation will occur together next winter. In our baseline scenario, the economy will experience stagnation but not fall into a recession. Inflation will first increase in the remaining months of 2025. However, we think inflation will gradually decline in 2026 since the tariff shocks coincide with weak demand and still elevated interest rates. Expansionary fiscal policy and interest rate cuts will help the economy become somewhat more dynamic in 2026, mainly in the second half of 2026. We currently expect two more interest rate cuts in 2025.

Average annual GDP growth will be modest in 2025 and 2026, with growth rates of 1.8% and 1.3%. We expect no recession in our baseline scenario, though the economy will stagnate for approximately three quarters before becoming more dynamic in 2027, achieving 1.9% growth. The unemployment rate will moderately increase in the coming months. Inflation will stay elevated in 2025 and 2026 before approaching the 2% inflation target.

“Unbalanced Trade 2.0” by Alejandro Cuñat and Robert Zymek.

“Do trade imbalances boost incomes in surplus economies at the expense of deficit economies? We show that the answer is yes in an important subclass of quantitative trade models. This is the consequence of scale economies concentrated in the traded sector. A rise in net exports causes the traded sector to expand, which raises productivity and real income in surplus economies. …major deficit economies may prefer to correct their traded-sector underproduction by moving to financial autarky. However, financial autarky reduces global welfare and is generally not the optimal policy to bolster the traded sector in the presence of scale economies.”

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“Accounting for Uncertainty and Risks in Monetary Policy” by Michael Bauer, Travis Berge, Giuseppe Fiori, Francesca Loria, and Molin Zhong.

“This paper discusses the measurement, assessment, and communication of risks and uncertainty that are relevant for monetary policy. It provides a taxonomy of policy-relevant uncertainty related to the state and the structure of the economy, and the formation of expectations. A wide range of tools is available to assess and quantify uncertainty and the balance of risks. Qualitative assessments of uncertainty—in policy statements, minutes, and speeches—are the main tools to communicate uncertainty and the balance of risks across major central banks. However, the use of quantitative tools for such communications including scenario analysis—is evolving, and so far no clear consensus has emerged for best practices.”

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“Harnessing artificial intelligence for monitoring financial markets” by Matteo Aquilina, Douglas Kiarelly Godoy de Araujo, Gaston Gelos, Taejin Park, and Fernando Perez-Cruz.

“We study how artificial intelligence can help monitor financial markets. We build a two-step tool that forecasts market stress and explains the reasons behind its forecast. First, a recurrent neural network learns from over one hundred daily market indicators. It predicts the average size of gaps between euro–yen traded directly and euro–dollar–yen traded via the US dollar. These “triangular arbitrage parity” gaps should vanish within seconds in normal times, and big or persistent gaps signal that market frictions are rising. Second, the model shows, day by day, which market indicators matter most for its signal. This information can then direct a large language model to search recent news about those high-importance indicators to add timely context.”

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“A Research Agenda for the Economics of Transformative AI” by Erik Brynjolfsson, Anton Korinek, and Ajay K. Agrawal.

“As we approach Transformative Artificial Intelligence (TAI), there is an urgent need to advance our understanding of how it could reshape our economic models, institutions and policies. We propose a research agenda for the economics of TAI by identifying nine Grand Challenges: economic growth, innovation, income distribution, decision-making power, geoeconomics, information flows, safety risks, human well-being, and transition dynamics. By accelerating work in these areas, researchers can develop insights and tools to help fulfill the economic potential of TAI.”

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“Outside Job Opportunities and the Gender Gap in Pay” by Peter Fredriksson, Dogan Gülümser, and Lena Hensvik.

“We show that the wages of men and women are differentially affected byoutside options, and that these differential responses contribute to the genderpay gap.”

“Using Swedish register data, we find that improved outside options are associated with higher within-job wage growth for men but not for women. Importantly, we can rule out that these gendered responses arise from differences in the quality of external offers as these are balanced across genders by design. Additionally, men’s and women’s job mobility responses are verysimilar. In the light of the model, we attribute these findings to differences in negotiation behavior between men and women. Policies encouraging women to bargain in response to outside options may thus be a powerful tool for reducing the remaining within-job gender gap in pay.”