Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 22
RHYTHMIC REASONING | TEMPO, TIMING AND TUNING
U N I T E D S TAT E S
Derek Holt
Walid Khalid
Vice President, Scotiabank Economics
Director, Investment Strategy
2024
2025f
2026f
GDP Growth
3.8%
2.8%
1.8%
1.4%
Inflation
2.9%
3.0%
2.8%
2.4%
Unemployment
4.3%
4.0%
4.2%
4.5%
Budget Bal.
-6.3%
-6.6%
-5.8%
-6.8%
Latest
2024
1-yr fwd
2-yr fwd
3-mo yield
3.9%
4.3%
3.6%
3.6%
10-yr yield
4.2%
4.6%
4.4%
4.5%
Yield curve slope
0.2%
0.3%
0.7%
0.9%
Source: Scotia Wealth Management, Bloomberg Finance LP.
"Latest" values are as at September 30, 2025 and, for data other than bond yields,
pertain to the most recent monthly, quarterly, or annual reading available on this
date. | Forecasts are based on Scotiabank Economics forecasts dated September
11, 2025 | 2024 inflation and unemployment are based on the average YoY rates
for each month of the year. | 2024 yields are as at December 29, 2024. Forward
periods are relative to September 30, 2025 and are based on forward market pricing.
KEY CONCLUSIONS
•
•
•
Unwinding of trade-related distortions caused GDP growth
to bounce back, but underlying demand conditions have
moderated, a trend we expect to carry over into 2026.
Moderating economic growth and labour market conditions
may offset upside risks to inflation, paving the way for the
Fed to continue easing into 2026.
The GOP are likely to retain the Senate but lose the House
in the 2026 midterms, putting an end to President Trump’s
legislative ambitions.
U.S. GDP REBOUNDED IN 2Q25 BUT DOMESTIC DEMAND
CONDITIONS ARE SOFT
The U.S. economy rebounded into growth territory in 2Q25, with
output expanding by 3.3% on a quarter-over-quarter annualized
basis (QoQ) according to the second reading from the Bureau of
Economic Analysis. The sharp turn from 1Q’s -0.5% decline was by
and large driven by a reversal of the trade-induced decline in GDP
that quarter due to tariff front-running, as a net trade drag of -4.6
ppts in 1Q was followed by a boost of 5 ppts in 2Q. As companies
drew down from their stockpiles built in 1Q, inventories also went
from a 2.6 ppts contribution to a 3.3 ppts drag.
Fig. 1: U.S. GDP contracted for the first time
in three years on the back of surging imports
9%
QoQ annualized % chg
Latest
6%
3%
0%
-3%
-6%
3Q24
Pers. consumption
4Q24
1Q25
Gov't expenditures
Priv. inv.
2Q25
Net exports
GDP
Source: Bureau of Economic Analysis, Bloomberg
Finance LP, Scotia Wealth Management
Trade and inventory distortions aside, the drivers for growth
were mixed as household consumption strengthened but fixed
investment slowed to a crawl. These trends resulted in growth in
final sales to domestic purchasers inching higher to a 1.6% QoQ
pace from 1.5% in 1Q25. Despite the marginal improvement, the
latest reading remains well below the long-term historical average,
pointing to softer underlying domestic strength than the headline
GDP reading of 3.0% suggests (Fig. 2). We expect this trend to carry
over into 2026, with real GDP forecasted to slow to 1.4% from our
2025 forecast of 1.8%.
While growth is expected to moderate, the situation is far from
disastorous, and the economy has fared reasonably well despite
elevated uncertainty. After the second quarter rebound in growth,
third quarter GDP is tracking toward a very healthy 3.8% quarterover-quarter annualized gain, according to the Atlanta Fed’s
GDPNow forecast dated October 1.
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