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:
Gus Faucher: Hi, I am Gus Faucher, Chief Economist for the PNC Financial Services Group with an economic outlook for the fourth quarter of 2025. As of the time of this taping in early November, the federal government is experiencing the longest shutdown in our nation's history. This is having a couple of impacts on the US economy.
First, economic growth in the fourth quarter is likely to be lower because of the shutdown. Federal government workers and contractors aren't being paid, and that may lead them to cut back temporarily on their spending. But generally with shutdowns, we see economic activity rebound once the shutdown ends and workers are paid their back pay.
The second concern is the lack of economic data. So for example, we're not getting data on the labor market or on inflation from the federal government because government statisticians are out of work. This makes it difficult for us as economic forecasters. It also makes it difficult for the Federal Reserve, which needs to set interest rates in order to keep the labor market strong and keep inflation low.
And so this will make it more difficult for the Fed to determine monetary policy, the level of interest rates, as long as the government shut down persists. But overall, the US economy is doing well at the end of the year. In particular, PNC's small business survey for the fall of 2025 found some of the strongest results in the more than 20 year history of our survey.
The share of small business owners that was pessimistic about their company's prospects over the next six months was less than 1%. And small business owners are also feeling optimistic about the outlook for the national economy, the global economy, and their local economy. So although small business owners are concerned about the potential for recession and the potential for higher inflation, overall they're feeling pretty confident about the way things are going. That being said, interest rates in the US economy remain elevated, although they're down somewhat over the past year or so. The Federal reserve cut interest rates vary sharply with the pandemic in order to support economic growth.
But then as inflation picked up and the economy recovered, we saw the Fed aggressively raise short-term interest rates in particular. Then towards the end of 2024, as inflation started to slow, the Fed eased somewhat and the Fed has been easing so far in 2025. We've seen the Fed cut the Fed funds rate by about half of a percentage point over the last few months as concerns about the labor market have increased and concerns about inflation have eased somewhat.
That being said, there's no guarantee that the Fed will continue to cut interest rates going forward, and the lack of data makes it more difficult for the Fed to do its job. And although interest rates are down from where they were a year or two ago, they're still much higher than they were prior to and during the pandemic.
And we continue to see drag from higher interest rates on industries such as home building and durable goods, big ticket items, as it's more expensive to borrow to buy these types of goods. And so high interest rates, although not quite as high as they were a year or two ago, are a drag on the US economy at the end of 2025.
We're also seeing a slowing in the labor market. The labor market is still good. The unemployment rate as of August was 4.3%, right where the federal, right where the Federal Reserve wants it to be over the longer run and the economy continues to add jobs, but the pace of job growth has slowed. If you look at the blue line, that's employment from a survey of employers from the Bureau of Labor Statistics, we only have the data through August because of the shutdown. We haven't gotten the September and October jobs reports. You can see that job growth has slowed significantly in 2025. In 2023, the US economy was adding more than 200,000 jobs per month. Last year, the economy was adding about 160,000 jobs per month.
But in the summer of 2025, the economy was adding about 30,000 jobs per month. A significant slowing in job growth. Some of this is due to restricted labor supply. With fewer immigrants with increased deportations, there aren't just, there just aren't as many workers out there, and so that's weighing on job growth. But it's unclear to what extent businesses are cutting back on hiring because they're concerned about the outlook.
But we are seeing a significant slowing in job growth, and that's one of the reasons we've been seeing the Federal Reserve cut interest rates in recent months. We're also starting to see a bit of a pickup in inflation. This chart shows various measures of consumer inflation, the prices that we pay as consumers, the percent change from a year earlier.
You can see that we have had an uptick in food and beverage inflation, in energy inflation, in what we call core goods; the orange line, that is goods excluding food and energy in recent months. Inflation is picked up for all of these types of goods in part because of tariffs. And so the concern from the Federal Reserve is, is that higher tariffs will continue to push up inflation, particularly for goods, and that that may make inflation further above the Federal Reserves 2% objective.
We continue to see slower inflation for core services compared to where we were a couple of years ago. That's things like housing, education, healthcare, but it's still running well ahead of its pre pandemic pace, and the Federal Reserve is concerned that inflation is above its 2% objective and is likely to move higher still in the near term given tariffs.
And that may make the Federal Reserve reluctant to cut interest rates more aggressively, given that inflation is already higher than they want. But there are structural factors that will keep the labor market tight in the near term, and that should limit job layoffs. The labor force participation rate; the share of adults who are either working or looking for work has fallen significantly over the past 25 years due to the retirement of the baby boomers.
It fell very sharply during the pandemic has rebounded somewhat, but it is been slowing over the past couple of years because of the aging of the baby boomers and now in 2025 because of restrictions on immigration. This tight labor market will make it difficult for employers to hire going forward. And what that means is, is that even if business conditions soften somewhat, businesses will be reluctant to lay off workers because they're going to be concerned about finding them again, once demand starts to pick up.
So we see layoffs in the US economy that remain historically low. We're seeing less hiring businesses have cut back on hiring. If a worker leaves, maybe they don't replace her. But what we're not seeing is widespread layoffs in the US economy in 2025. And as long as the job market continues to hold up, as long as layoffs remain low, consumers will continue to increase their spending and that should power economic growth going forward.
Our baseline outlook is for slower economic growth in late 2025 and in 2026 due to high interest rates, due to the temporary impact of the government shutdown, and due to slower job growth, but not a recession in the US economy, not a contraction in economic activity. We do expect to see significantly weaker job growth in late 2025 and in early 2026 compared to what we've seen over the past few years, but not an actual outright contraction in economic activity.
And with slower economic growth, we do expect to see a slight increase in the unemployment rate going forward. I would expect it to get up to about 4.7% by the middle of 2026 compared to 4.3% in the middle of 2025, but still as historically strong labor market, still an historically low unemployment rate. We also expect that the Fed will continue to cut interest rates in the near term.
We expect to see a further cut in the Fed funds rate toward the end of 2025 and then again in early 2026. These lower interest rates will support a little bit stronger economic growth in the second half of next year, and that will lead to a slight decline in the unemployment rate in 2027. That being said, risks to the outlook are weighted to the downside.
The drags from the shutdown and from higher tariffs could be greater than we're expecting. The global economy is at serious risk of recession, in part because of the ongoing trade war, and that could become a drag on the US economy. But there is also upside for potential for the US economy in the near term, from strong business investment, particularly in artificial intelligence and from reduced government regulation.
Thank you very much for your time. You can see all of our materials at pnc.com/economicreports, and you can follow me on X, formerly Twitter @GusFaucherPNC. Thank you.
