Augustine (Gus) Faucher is senior vice president and chief economist of The PNC Financial Services Group, serving as the principal spokesperson on all economic issues for PNC.
Prior to joining PNC as senior macroeconomist in December 2011, Faucher worked for 10 years at Moody’s Analytics (formerly Economy.com), where he was a director and senior economist. He was responsible for running the firm’s computer model of the U.S. economy, edited a monthly publication on the U.S. economic outlook, covered fiscal and monetary policy, and analyzed various regional economies. Previously, he worked for six years at the U.S. Treasury Department, and taught at the University of Illinois at Urbana-Champaign. He was named senior vice president in March 2015, deputy chief economist in February 2016, and to his current role in April 2017.
Faucher is frequently cited in international, national, and regional media outlets including The Wall Street Journal and The New York Times. He has appeared on ABC World News, CBS Evening News, NBC Nightly News and Nightly Business Report, and is regularly featured on CNBC, CNN and Fox Business. In addition, he appears regularly on CBS Radio, NPR and Marketplace.
Webcast Transcript:
Hi, I am Gus Faucher, Chief Economist for the PNC Financial Services Group with an economic outlook for the second quarter of 2025. The US economy is in good shape in the Spring of 2025. There are, but there are big concerns about the impact of tariffs on the economy. The economy started this year on a strong footing.
According to the results from PNCs semi-annual small business survey, which was out in the field from early January to early February, small business optimism about their own company's prospects was near a 20 year high. In addition, small businesses were feeling optimistic about the outlook for the national economy, the global economy, and the local economy.
We also saw the Federal Reserves start to cut interest rates in the fall of 2024 as inflation slowed the Fed funds rate, the Federal Reserve's key short-term policy rate, is closely tied to the blue line, the yield on a three month treasury bill. And in the fall of 2024 with inflation slowing, the Fed felt comfortable cutting that Fed funds rate and they cut it by a full percentage point in the last part of 2024.
The Fed has been on hold in 2025, concerned about the fact that inflation, which had been easing in 2024 is seeing less progress in 2025, and concerned about the potential inflationary impacts of tariffs and restrictions on immigration. Long-term interest rates here, that orange line is a yield on a 10 year treasury note, what it cost the federal government to borrow for 10 years, peaked in late 2023, has moved up and down since then, but is generally higher than it was before the pandemic. The labor market is very strong in early 2025. After losing 22 million jobs with the pandemic, the economy has added back all of those jobs, plus about 9 million more million and job growth remains solid so far in 2025.
The unemployment rate, which reached almost 15% in early 2020 with the pandemic, fell very sharply afterwards, got down to 3.4% for a couple of months in 2023, the lowest rate in more than 50 years, and has moved up a little bit since then, but it just above 4% is still historically low, and the US economy has done very well relative to its peers.
This is the cumulative change in real GDP output of goods and services adjusted for inflation. That is, this measures volumes and not prices since just before the pandemic to the end of 2024. What you can see is the US economy is about 12% larger than it was before the pandemic. We are producing about 12% more goods and services than we did before the pandemic.
That's by far the strongest performance among the G7 nations. You can see that Canada is in second place at just above 8%, and the German economy is actually slightly smaller than it was before the pandemic. So the US has definitely outperformed its peers. But the risk to the outlook have increased dramatically.
In particular, we have seen a huge increase in tariffs. That is taxes on imported goods into the United States. Historically, the tariff rate over the past 75 years has been in the mid to low single digits. That is tariff revenues as a share of goods imports are somewhere between 2 and 5%.
With the tariffs that the Trump administration has announced as of mid April that rate would jump to above 25%, assuming the same distribution of imports as we saw in 2024. If we take into account the fact that the distribution of imports will shift, for example, with 145% tariffs on goods from China, we expect to see many fewer imports from China and more imports from countries with lower tariff rates.
But even accounting for the substitution effects, the tariff rate would be about 16% or about eight times higher than it is now. That is going to dramatically raise costs for consumers. It's going to dramatically raise costs for businesses and will act as a tax that slows economic activity. In addition, the stock market has responded very negatively.
We've seen stock prices fall about 19%. From their peak in February of this year to their trough earlier in April. That being said, that type of decline in the stock market does not necessarily indicate that a recession is coming. Usually it's when we see declines in stock prices of 25% or more that a recession is imminent.
Consumers and businesses are very concerned about the impacts of tariffs. Consumer confidence has fallen over the past few months and is now at its lowest level since the pandemic. Small business optimism, the orange line on the right hand scale is also down sharply from late 2024, although it is still higher than it was for most of the past few years.
But it is fair to say that consumers and businesses are worried about the potential impacts of tariffs on their spending, on their investment, and so forth. PNCs economic outlook for 2025 is for weaker economic growth, but no recession. Tariffs will be a drag on the economy, higher prices for businesses, higher prices for consumers, and in addition, the uncertainty surrounding the tariffs themselves will be a drag as well.
If businesses don't know what the tariffs are going to be, it's going to be difficult for them to make investment decisions, and that will act as a drag on economic growth as well. We expect to see much weaker real GDP growth this year, but not a recession, not an outright contraction in economic activity.
With weaker growth, we expect to see a softer labor market, and we expect to see the unemployment rate, which is just above 4% in the spring of 2025. Increased to around 5% late this year and in early 2026 before it gradually starts to decline. Risk to the economic outlook are to the downside. The longer the tariffs remain in place, the higher the tariffs are, the more countries they apply to, and the greater the uncertainty surrounding the tariffs, the higher the risk of recession in 2025 and 2026.
Thank you very much for your time. You can find all of our materials at pnc.com/economicreports and you can follow me on X formerly Twitter @GusFaucherPNC.
