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 Third Quarter of 2025. The US economy remains in good shape in mid 2025. Since the pandemic, the United States economy as measured by real GDP, that is output of goods and services, adjusted for prices is about 12% larger than it was before the pandemic.
This is much stronger than the performance of other developed economies among the G7 nations. Canada is in second place at around 8.5%. The Eurozone economy is around five and a half percent larger than it was before the pandemic and the German economy has barely grown. The US Labor market has also in good shape in mid 2025.
The economy lost 22 million jobs in March and April of 2020 with the pandemic, but then employment came back very strongly and is now about 8 million higher than it was before the pandemic. Job growth has slowed in 2025. That's not surprising, given slower growth in the labor force, but remains solid at around 150,000 jobs added per month.
Similarly, the unemployment rate, which jumped up to almost 15% in April of 2020 with the pandemic fell very sharply to 3.4% for a month in 2023 is now around 4.1% as of mid 2025, but that is still historically low and consistent with what the Federal Reserve regards is its mandate for full employment.
But, although the economy is doing well, interest rates remain elevated. In the immediate wake of the pandemic, the Federal Reserve cut short-term interest rates dramatically. They cut their Fed funds rate, their key short-term policy interest rate down to zero, and that pushed the yield on a three month treasury bill, what it cost the federal government to borrow for three months, close to zero as well. Then with the economy recovering in high inflation, the Federal Reserve aggressively raised that Fed funds rate up to above 5% by early 2023. Then in mid 2024 with inflation slowing, the Fed felt comfortable cutting the Fed funds rate and reduced it by a full percentage point.
But in 2025 with concerns about higher inflation from tariffs, the Fed has kept that Fed funds rate unchanged in its range between four and a quarter and 4.5%. The Fed also tried to reduce long-term borrowing costs in the aftermath of the pandemic. The yield on the 10 year treasury note, what it cost the federal government to borrow for 10 years, fell below 1%, but then with the economic recovery and high inflation, we saw long-term yields rise as well.
They've been between 4 and 5% for the last couple of years, even as the Fed has eased short-term interest rates. And these high interest rates are a drag on the economy in mid 2025. What's also a drag on the economy is much higher tariffs. The blue line on the left hand scale is the effective tariff rate. That is tariff payments. Tariffs are a tax on imports as a share of total goods imports into the United States, and you can see that for most of the past 75 years that effective tariff rate has been in the low single digits. But with the tariffs that President Trump has announced through June 16th, that effective tariff rate has gone up seven times to around 14%.
This is going to dramatically raise costs for consumers and businesses, and that is going to lead to higher inflation. It's also going to leave less money for consumers to spend on other goods and services, and less money for businesses to invest. And the uncertainty surrounding the tariffs themselves as a drag on the economy as well.
If consumers don't know what prices are going to be in a few months. If businesses don't know what tariffs are going to be three months from now, or three years from now, they may be reluctant to make big decisions about purchases and investment, and that in turn is creating an additional drag on growth apart from the tariffs themselves. And that's reflected in reduced consumer and business confidence.
The blue line on the left hand scale is consumer confidence. You can see that that's fallen very sharply in early 2025 with all of the tariffs announcements, and in April was down to its lowest level since the pandemic. It's come back a little bit since then for remains much lower than it has been over the past few years.
Similarly, we've seen a big drop in small business optimism since the announcement of the tarriffs. It's higher than it was a couple of years ago, but much lower than it was in late 2024 and early 2025. Now just because small business optimism and consumer confidence are lower, that doesn't necessarily translate into a weak economy.
We saw low levels of optimism and confidence a couple of years ago, even though the economy was doing well. But it could be that these declines in consumer confidence and small business optimism will be reflected in weaker economic activity in the months ahead. That being said, the job market still looks to be in pretty good shape.
The blue line on the left hand scale is layoffs in the private sector as a share of total employment. So this doesn't include, for example, those DOGE Federal cuts to government employees, but you can see that layoffs remain historically low after the pandemic businesses were caught short with too few workers, they don't want that to happen again, and so they're keeping layoffs low.
On the other hand, what we have seen is weaker hiring in the US economy. The orange line on the right hand scale is hiring as a share of private sector employment, and you can see that that has fallen dramatically over the past few years, but still, the economy continues to create jobs and as long as layoffs remain low, as long as employment is going up, then the US economy should continue to expand.
The economy will be getting support from the Big Beautiful Bill that Congress passed and that President Trump signed earlier this summer. The green bars are the federal government's projected budget deficit from the congressional budget office post the Big Beautiful Bill compared to the blue bars, which were projected budget deficits pre Big Beautiful Bill. What you can see is, is that with the tax cuts contained in the Big Beautiful Bill, those are going to greatly outweigh the spending cuts and that the federal government will experience larger government budget deficits going forward because of the Big Beautiful Bill. This is good news in the short run.
With tax cuts outweighing spending cuts, government will be a positive for economic growth in the near term, and that means that the economy should be a little bit stronger post Big Beautiful Bill compared to pre BBB. That being said, however, larger federal government budget deficits are putting upward pressure on interest rates, and that could crowd out private sector investment, which could be a drag on economic growth over the longer run.
Higher inflation is going to make it difficult for the Federal Reserve to cut interest rates in the near term. You can see that when we look at goods inflation, the green line energy inflation, the black line food and beverage inflation, and the orange line core goods inflation, that is inflation for goods, excluding food and energy.
All of those have slowed dramatically over the past few years. With tariffs, we will see importers passing along higher cost to consumers and businesses, and we expect to see a re-acceleration in inflation in the third quarter of 2025. That is going to make it difficult for the Federal Reserve to cut interest rates.
They want to see low inflation. That's part of their legislative mandate, and with inflation set to accelerate from tariffs, the Fed will be reluctant to cut interest rates. PNC does not expect to see cuts to the Fed Funds Rate until late in 2025 or an early 2026 when the inflationary impacts of tariffs should be easing.
But that means that in the near term interest rates will remain high and that will be a drag on economic growth. Given all of this PNCs forecast is for slower economic growth in 2025, but not a recession. Not an outright contraction in the economy, not outright wide scale job losses. The blue line is our forecast for GDP growth on the left hand scale, and you can see that is expected to be lower in 2025 and 2026 than it has been over the past few years.
But again, we're not expecting a recession. Given weaker economic growth, we expect to see the unemployment rate gradually increase over the next year or so, up to around four point a half percent by mid 2026. This is still low on a historical basis, but is a bit higher than the Federal Reserve would like to see.
And given that, we do think that the Federal Reserve will start to cut interest rates later this year or in early 2026. Thank you very much for your time. I appreciate the opportunity to speak with you. You can find all of our materials at pnc.com/economicreports, and you can follow me on X, formerly Twitter, @GusFaucherPNC.
