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36 minutes to read by  Eric Lascelles Aug 19, 2025

What's in this article:

With contributions from Josh Nye, Vivien Lee, Sheena Khan and Aaron Ma

Monthly economic webcast

Our monthly economic webcast for August is now available here: “More tariffs, damage becoming visible.”

Tariff hike in August

August brought the promised tariff increases. The average U.S. tariff rate rose from 14% to 17% (see next chart). This is a smaller jump than had been feared a month earlier but is nonetheless a significant increase.

Average U.S. tariff rate has risen to 17%

Average US tariff rate has risen to 17

Effective tariff rate estimated based on tariffs in effect as at the specific date and up to August 17, 2025; threatened rates not included. Excludes de minimis effect. All U.K. steel exports to U.S. are assumed to be covered under the quota system. Sources: Evercore ISI Tariff Tracker, International Monetary Fund (IMF), Macrobond, RBC GAM

The increase represents the combination of new copper tariffs, modestly higher tariffs for countries that struck a deal with the U.S., and more substantial tariff increases for those countries that failed to reach a deal (see next table). Mexico and China managed to negotiate an extension, delaying their prospective tariff hikes until November.

Present U.S. tariff landscape (major trading partners >1% of U.S. imports)

Present US tariff landscape major trading partners 1 of US imports

As of 08/18/2025. U.S.-UK Economic Prosperity Deal in effect as of June 30; all other tariffs except those with separate deadlines in effect as of August 7. Canada and Mexico tariffs only affect non-USMCA compliant goods; highlighted numbers indicate current tariff in effect. India’s tariff does not include the additional 25% secondary tariff expected to take effect August 27. Sources: IMF, The White House, RBC GAM

Our quick-and-dirty ranking of the most affected non-U.S. countries highlights that Vietnam is set to be the most adversely affected country – and by a significant margin. This is due to its combination of a large tariff and an enormous trade exposure to the U.S. (see next table). Mexico is a distant second, saved by the rising fraction of goods it has managed to qualify for the tariff exemption under the USMCA (US-Mexico-Canada Agreement) – which reduces its effective tariff rate.

Countries ranked by current U.S. tariff impact

Countries ranked by current US tariff impact

Effective tariff rates estimated based on tariffs implemented by the Trump administration up to August 7, 2025. Excludes de minimis effect. Sources: Evercore ISI Tariff Tracker, IMF, Macrobond, RBC GAM

Following those countries are a sextet of countries with substantial exposure to U.S. tariffs, if on a scale well below that of Vietnam and somewhat below Mexico. These are mostly Asian nations: Thailand, Malaysia, Taiwan, South Korea and China – with Canada the lone geographic exception.

For Canada (and Mexico) the burning question is less what tariff rate they eventually negotiate with the U.S., but rather whether USMCA-compliant products will continue to enjoy an exemption to the tariffs. If yes, both countries will ultimately be fine, if dinged up. But if the USMCA negotiations scheduled for the next year go poorly, there would be major problems for these countries.

-EL

Tariff rate confusion

The actual tariff revenue collected by the U.S. government continues to run well below what theory would suggest (see next chart). Admittedly, the latest realized tariff revenue data is only for June, but at that point there was a full 5 percentage point difference between the actual and theoretical tariff rate.

Average U.S. tariff rate continues to run lower than theoretical rate

Average US tariff rate continues to run lower than theoretical rate

Effective tariff rates estimated based on tariffs in effect as at the specified date and up to August 7, 2025; threatened rates no included. Excludes de minimis effect. All UK steel exports to U.S. are assumed to be covered under the quota system. Expected tariffs rate assumes instantaneous and complete implementation (i.e. does not account for shipping delays, implementation lags, etc.) Sources: Evercore ISI Tariff Tracker; IMF, Macrobond, RBC GAM

There are several ideas as to why this gap exists:

  • Substitution away from tariffed goods: The countries and goods with the highest tariffs are naturally seeing the sharpest decline in demand, reducing the realized trade-weighted tariff rate. But this doesn’t mean the tariffs are painless, as that redirection captures economic damage in a different form: consumption and investment is lower, and economic actors have to substitute toward inferior products.

  • Exemptions for goods in transit: The realized tariff rate may be significantly lagged because goods that are already in transit toward the U.S. when a new tariff is implemented are exempted from the levy. For products coming by ship from China, this can create up to a two-month lag.

  • Higher USMCA compliance: While we are doing our best to accurately identify which products enjoy tariff exemptions in Canada and Mexico, it remains both a guessing game and a moving target. More products appear to be enjoying the exemption than initially imagined, explaining some of the gap between the two lines.

  • Value-added auto exports from Mexico and Canada: At a more granular level, the effective tariff rate on vehicles imported from Mexico and Canada appears to be considerably below what was anticipated. To illustrate, the realized tariff rate on vehicles imported from Canada was just 0.5% in June, whereas we had assumed a 16% average rate: that the 25% auto tariff would apply to 65% of the imported vehicles’ value (an estimate of the non-U.S. value-added share).

  • Substitution toward temporarily non-tariffed goods: Duty-free imports from countries and sectors expected to be tariffed more heavily at a later date – such as Taiwan – have surged on the back of front-loading, temporarily pulling down the realized tariff rate.

While the first item argues that the realized tariff rate should remain below the theoretical tariff rate going forward, the others – to varying degrees – argue for notable if incomplete convergence between the two in the months ahead.

On the net, the lower realized tariff rate needs to be tracked closely in the coming months to see to what extent this convergence actually happens. If the convergence is only minimal, it would mean that the economic damage from the tariffs should be somewhat smaller than currently forecast.

-EL

Inventory stockpiling exaggerated

It was widely documented that U.S. imports surged in advance of the application of tariffs. Companies were seemingly seeking to minimize their tariff burden by pulling products into the country before tariffs took effect. This effect is most visible in the U.S. first-quarter GDP data (gross domestic product). Imports surged to such an extent that GDP (for which higher imports are a drag) actually shrank outright.

This is relevant to our forecasting, as the idea is that U.S. retailers may be able to delay passing through higher prices for an unusually long time as they work through the distended stockpile of cheap pre-tariff goods.

But a closer examination reveals that inventories were built up much less than imagined. The U.S. inventory-to-sales ratios for manufacturing, wholesale trade and retail trade have barely budged in 2025 (see next chart). The retail inventory-to-sales ratio is slightly higher – dragging up the overall index modestly – but not to a remarkable degree relative to the substantial undulations in the past.

U.S. inventory-to-sales ratio looks normal

US inventory to sales ratio looks normal

Manufacturing, wholesale and manufacturing and trade ratios as of May 2025, retail data as of June 2025. Shaded area represents recession. Sources: U.S. Bureau of Economic Analyst (BEA), Haver Analytics, RBC GAM

As a result, the notion that retailers have been able to delay raising prices for longer than normal due to an unusual inventory buildup appears not to be true, at least at the aggregate level. In turn, while one might still expect it to take several months for a product to work its way through normal-sized manufacturing, wholesale and then retail inventories – and so for pricing increases to be delayed by that approximate amount – this is just the normal state of affairs whenever a foreign product becomes more expensive.

How to reconcile this with the aforementioned import surge at the start of the year? A large fraction of those imports were in gold, which was never destined to sit in commercial inventories.

-EL

Tariffs: a sales tax in disguise?

The U.S. has now collected $130 billion in tariff revenue year-to-date. That’s a 130% increase relative to the same period in 2024.

The Yale Budget Lab estimates that current tariff policies will increase the U.S. effective tariff rate by 15 ppts after accounting for substitution away from tariffed goods. That will bring in an additional $200 billion in annual revenue over the next five years – on top of the roughly $100 billion typically raised by import duties – once anticipated negative economic effects are considered. This amounts to a significant tax increase – one that historical analysis suggests will largely fall on American consumers.

For comparison, the Congressional Budget Office (CBO) and Joint Committee on Taxation estimate that a 5% value-added tax (VAT) would raise $340 billion annually over five years. A more narrowly based VAT excluding essentials like health care, education, housing, and food purchased for home consumption would generate about $215 billion annually – similar to the estimated increase in tariff revenue.

So, the White House seems to have found a politically feasible way to implement something akin to a national sales tax, which the U.S. has long resisted. As the chart below shows, even with federal excise taxes and some state-level retail sales taxes, the U.S. collects less revenue from consumption taxes than its OECD peers. Instead, it relies more on personal income taxes.

The U.S. collects less of its revenue from consumption taxes than OECD peers

The US collects less of its revenue from consumption taxes than OECD peers

As of 08 /06/2025. Sources: Tax Foundation, Organisation for Economic Co-operation and Development, RBC GAM

Economists tend to favour value added taxes over income taxes. They are less distortionary to savings and investment decisions, easier to administer and enforce, and offer more stable revenue. Sharp tariff hikes have been accompanied by personal and corporate income tax cuts in the One Big Beautiful Bill, even if that relief largely comes from deductions and exemptions rather than lower tax rates. Is this shift in the tax burden a step in the right direction?

Not exactly. Tariffs have several shortcomings relative to VAT:

  • Tariffs apply to a narrower base (imported goods as opposed to most goods and services consumed domestically), hence the need for a significantly higher rate to raise the same amount of revenue. The current patchwork implementation of tariffs – with rates varying significantly by country and product – makes them even narrower. A higher tax rate applied to a smaller base tends to increase economic distortions.

  • VAT rebates for exporters help maintain competitiveness. Import tariffs can add to production costs for domestic producers, making U.S. exports less competitive abroad.

  • VAT is levied on incremental value added throughout the production process. Tariffs are applied at the point of entry and apply to the total customs value of goods. Unless duty relief is available, that raises the risk of goods being tariffed more than once if they cross the border multiple times during the production process. This has been a particular concern for North America’s highly integrated auto sector.

  • VAT applies to imports and domestic production alike. Tariffs discriminate against foreign goods, raising the risk of retaliation by trading partners. However, only a few countries, including China and Canada, have imposed retaliatory tariffs thus far.

  • Only applying tariffs to imported goods could give domestic producers cover to raise prices, even if they are not directly impacted by duties. That can result in more inflation than tariffs themselves – or an equivalent VAT – would be expected to generate. There was some evidence of this behaviour during Trump’s 2018-19 trade war.

  • VAT and tariffs are both regressive taxes – more burdensome for those with lower incomes – but VAT is less regressive as it also applies to services, which are consumed more by higher income households. According to the Yale Budget Lab, tariffs have more than 3x the impact on the bottom 10% of earners as on the top 10%. Meanwhile, the recent tax bill disproportionately benefited higher income households.

That said, there are some advantages to tariffs relative to VAT:

  • VAT is paid by consumers. Tariff costs can theoretically be offset by currency appreciation or partially absorbed into foreign exporters’ and/or domestic importer/wholesaler/retailers’ margins. The former two channels (currency and export margins) are key to the sales pitch of tariff costs being borne by foreigners. But the currency channel isn’t helping this time around, and research suggests tariffs were largely passed onto consumers during the 2018-19 trade war.

  • Tariffs generally make domestic production more competitive relative to imports. VAT applies to both imports and domestic production. However, any boost to domestic investment and output comes at the cost of supply chain headaches, reduced specialization and lower productivity, and less selection for consumers.

  • From a political expediency standpoint, the White House has managed to raise significant new revenue using tariff authority delegated by Congress, whereas Congress itself would have to legislate a VAT. However, this can be seen as a subversion of the legislative branch’s power to tax.  In addition, President Trump’s tariffs under the International Emergency Economic Powers Act are being challenged in court.

The distortions caused by tariffs make them a less-than-ideal alternative to VAT – which is why economists tend to advocate for the latter. But a VAT or a national sales tax is seen as a political non-starter, whereas the Trump administration seems to have found a way to bypass Congress and raise revenue in a way that ostensibly supports domestic investment and production and (in its telling) shifts the tax burden onto foreigners.

However, voters seem skeptical with polls showing growing opposition to President Trump’s trade policies. While there is some early evidence of foreign and domestic margin compression – as discussed in our previous #MacroMemo – we expect most tariff costs will ultimately be borne by domestic consumers, lifting inflation to around 3.5% over the next year. And while the tax cuts that have accompanied these tariffs will provide a modest boost to growth in the second half of 2025 and 2026, we think the net effect of President Trump’s policies will be a drag on the economy.

-JN

Tariffs after Trump?

It is tempting to assume that President Trump’s tariffs will vanish when the next president take’s office in early 2029. After all, past presidents of the modern era have shown no similar appetite for tariffs, tariffs are known to do economic damage, and tariffs are presently unpopular with the public.

Indeed, for these reasons they could vanish as quickly as they appeared, with substantially positive implications for U.S. and global economic growth at that time.

But it is far from certain that the tariffs are substantially reversed. There are four main reasons for this.

  1. Never underestimate inertia, especially in public policy: it is much harder to change a policy than to leave the existing policy in place.

  2. The longer the tariffs are in place, the harder it is to get rid of them. Four years is a long time. The higher prices will become unremarked upon after a few years. As an example, it is barely ever noted that the U.S. has long applied tariffs on certain products including foreign dairy, sugar, orange juice, light trucks and bicycles.

    The companies that are hurt by the tariffs shrink or even fail, losing their place at the policy advocacy table. Foreign brands are forgotten. Meanwhile, the companies that benefit from the tariffs will lobby to keep them. Some of these firms will even become dependent on the tariffs, perhaps because they didn’t bother to innovate while shielded from foreign competition, or because foreign firms took great leap forwards over the intervening years. By that time, some American companies will have built new factories, warehouses and stores. To remove the tariffs would amount to killing these facilities and perhaps even the companies.

  3. The U.S. government may become reliant on the additional tariff revenue, potentially worth several hundred billion dollars per year, to fund other initiatives. It is fairly likely that in four years the U.S. public deficit will remain quite large, meaning that eliminating the tariffs would just exacerbate the fiscal problem given the evident lack of appetite to raise taxes or cut spending elsewhere.

  4. If the next president is a Republican, it may be difficult for them to reverse President Trump’s keystone policy. Meanwhile, should it be a Democratic president, the Democratic Party has become increasingly skeptical of trade liberalization over the past 15 years. President Biden notably left in place President Trump’s first-term China tariffs. In recent years, neither party has permitted the appointment of new judges to the World Trade Organization’s dispute mechanism, effectively neutering it. During an era of great powers throwing their weight around, and with considerable worldwide xenophobia, it is far from certain that tariffs will be culled.

The point isn’t that all of the tariffs will remain indefinitely, but rather that it isn’t quite automatic that they all vanish in 2029. Depending on the political dynamic at the time, a middle ground might imagine a partial reduction over a period of several years as countries negotiate new comprehensive trade deals with the U.S.

This greatly matters, not just for the economic outlook at that time, but also because businesses must decide whether to hold their noses and wait for the tariffs to be removed, or to embrace them and relocate factories. Either decision could be disastrous if the underlying assumptions about what happens in future election cycles prove wrongheaded.

-EL

Economic update

U.S. economic data continues to tilt in a softer direction (see next chart).

U.S. economic data have deteriorated since Trump inauguration

US economic data have deteriorated since Trump inauguration

As of 08/18/2025. Sources: Citigroup, Bloomberg, RBC GAM

While the latest retail sales report was fine, the twin Institute for Supply Management (ISM) reports for July were both slightly weaker than the prior month. July payrolls not only missed expectations but managed an enormous -258,000 negative revisions to the prior two months’ job creation estimates. That leaves the 3-month average rate of job creation in the U.S. at just +35,000 per month.

Our own composite job growth indicator argues that the true trend may not be quite this bad when a broader set of employment variables is considered, but the deceleration in job creation is undeniable (see next chart). Of course, given the sharp drop in immigration, it makes sense that job creation should be somewhat smaller. Accordingly the unemployment rate has only edged higher, to a still robust 4.2%.

The U.S. labour market is softening, but not as much as payrolls suggest

The US labour market is softening but not as much as payrolls suggest

Composite indicator based on payrolls, household survey, initial claims and ADP employment. As of 08/06/2025. Sources: U.S. Bureau of Labor Statistics (BLS), Department of Labor, ADP, RBC GAM

The weaker payrolls data was the data point that abruptly tipped the balance for the next Federal Reserve decision on September 17. An 84% chance of a 25 basis point rate cut is now priced. Inflation pressures – discussed next – are what prevents the pricing from showing even more conviction.

-EL

Inflation pressures

The U.S. July Consumer Price Index (CPI) was not especially hot on the aggregate due to lower gas prices, flat food prices and the lagged effect of tempering home prices. However, tariff pressures have now clearly come into view in both the June and July figures. Core inflation rose by 0.322% in July, the quickest pace in six months (see next chart).

U.S. CPI monthly trend shows core inflation rising

US CPI monthly trend shows core inflation rising

As of July 2025. Shaded area represents recession. Sources: BLS, Macrobond, RBC GAM

Core inflation on an annual basis is now above 3% for the first time since February at +3.1% year over year (YoY). Core goods inflation – and recall that tariffs appear most directly in goods prices – has now accelerated to +1.2% YoY – the fastest clip in two years (see next chart). While that isn’t an enormously fast rate of growth in an absolute sense, keep in mind that most inflation usually comes from service sectors, with goods prices usually approximately flat over the long run.

U.S. goods inflation is no longer falling; services inflation starting to rise as well

US goods inflation is no longer falling services inflation starting to rise as well

As of July 2025. Shaded area represents recession. Sources: BLS, Haver Analytics, Macrobond, RBC GAM

There were further signs of tariff passthrough in highly trade-oriented products such as furniture and recreational goods. Curiously, appliance prices were actually lower, though only after a large increase in earlier months. New car prices remain subdued, though carmakers report that their margins are being significantly compressed – economic damage appearing in a non-price fashion.

It is notable that U.S. median CPI is staring to rise on a year-over-year basis after a multi-year uninterrupted decline (see next chart).

Both headline and median CPI turned up tentatively

Both headline and median CPI turned up tentatively

As of July 2025. Shaded area represents recession. Sources: BLS, Federal Reserve Bank of Cleveland, Macrobond, RBC GAM

Our tracking of real-time inflation pressures continues to highlight the potential for further substantial price increases in key traded products (see next chart). Producer prices – a theoretical precursor to consumer prices – were also quite hot in the latest month.

U.S. Daily PriceStats Inflation Index shows potential for substantial price increases

US Daily PriceStats Inflation Index shows potential for substantial price increases

As of 08/09/2025. Sources: State Street Global Markets Research, RBC GAM

The fraction of businesses planning to raise their prices has increased in 2025. However, this unwound slightly in the latest month, perhaps as tariff fears subsided somewhat (see next chart). The chart is also a useful reminder that this inflation shock, while potentially unpleasant, is set to operate on a much smaller scale than the gargantuan one during the post-pandemic scramble.

Fraction of U.S. businesses planning to raise prices

Fraction of US businesses planning to raise prices

As of July 2025. Shaded area represents recession. Sources: National Federal of Independent Business (NFIB) Small Business Economic Survey, Macrobond, RBC GAM

We continue to look for about a 1% increase in the overall U.S. consumer price level from tariffs, of which a few tenths of a percentage point have now been delivered.

But, as flagged earlier, there are other forces at work. The weaker U.S. dollar is potentially slightly inflationary, constituting an exacerbating force. Conversely, and probably more powerfully, U.S. shelter costs are now exerting a persistent disinflationary effect. And oil prices are distinctly lower than they were a year ago (see next chart).

Crude oil prices fall as OPEC+ increases production

Crude oil prices fall as OPEC increases production

As of 08/15/2025. Sources: Macrobond, RBC GAM

Lower oil prices are due to both supply and demand forces. On the supply side, the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, has clearly pivoted from profit maximization to market share maximization, seeking to squeeze swing oil producers such as the shale oil industry. An uncertainty is whether Iran and Russia might be subjected to stiffer sanctions, reducing their supply, but the answer for the moment appears to be “no.”

On the demand side, the International Energy Agency (IEA) has downgraded its oil demand forecast for the sixth consecutive month, to the point that it now anticipates a large two million barrel-per-day oil surplus in 2026. Oil demand is expected to grow this year at its weakest rate since 2009 (excepting the brief pandemic-lockdown crash).

While some of this may be cyclical, reflecting anticipated economic damage from tariffs, it has to be said that some is likely also structural. OECD oil demand has been declining since the mid-2000s, and European demand peaked even before that. It remains to be seen whether the U.S. has truly reached its demand peak, especially as the appetite for electric cars faulters slightly, but the data tentatively suggests demand could be starting to flatten out.

Meanwhile, key emerging economies such as China, Brazil and India have been central to the IEA’s recent demand forecast downgrades. Electric vehicles now constitute half of China’s auto demand and oil demand there, too, could be structurally peaking (see next chart).

China’s oil demand now starting to decline

Chinas oil demand now starting to decline

As of July 2025. Sources: Bloomberg, RBC GAM

This isn’t to say that global oil demand is in free fall. The best estimates look for global demand to continue rising for a few more years, peaking between about 2029 and 2034. And demand should be fairly high for years afterward.

In short, it arguably makes sense that oil prices are fairly low today given the pairing of intentionally excess supply and tepid demand. We assume more of the same in the near term.

-EL

Earnings calls show relaxing tariff concerns

With more than 90% of S&P 500 companies having reported, it’s worth examining key topics discussed on Q2 earnings calls. Recall, Q1 earnings season was dominated by talk of tariffs, pricing strategy, material costs and a potential economic slowdown.

But Q2 brought some return to normalcy, with each of those subjects seeing a sizeable decline in mentions relative to Q1. Rather, other hot topics like AI and crypto saw the largest increase in mentions quarter-over-quarter.

That is not to say tariffs weren’t still part of the discussion – tariffs and trade war saw the greatest net increase in mentions over the past two quarters (see table below). Major companies in sectors ranging from consumer discretionary and staples to tech and industrials warned of tariff impacts in the $1 billion-plus range.

Changes in topics on S&P 500 earnings calls

Changes in topics on SP 500 earnings calls

As of 08/11/2025. Quarters prorated by number of earnings calls. Sources: Bloomberg, RBC GAM

A few other observations from recent quarterly earnings calls:

  • More talk of tailwinds and less talk of headwinds, consistent with the rebound in some business sentiment measures.

  • Less discussion of consumer confidence, demand and spending amid a recovery in consumer sentiment. That said, some consumer-facing firms continued to note slower demand from lower income households. Others said they were offering greater incentives to attract cautious consumers.

  • More discussion of taxes after the One Big Beautiful Bill was signed into law on July 4. Capex mentions only rebounded slightly despite significant new incentives offered in the tax bill.

  • Less talk of pricing strategy with several companies focusing on productivity-enhancing or cost-cutting initiatives to defray tariff costs. One consumer staples company said about one-quarter of its products were impacted by tariffs, though price increases for those items were only expected to be slightly greater than normal, in the mid-single digits.

  • More discussion of margins as sectors outside of tech and financials saw their net income margins shrink relative to a year ago (see table below). One automaker saw a one-third reduction in its pre-tax profit margin due to tariffs, while an industrial bellwether said tariffs would trim its operating margin from the upper half to the lower half of its target range.

  • Less talk of inventory following the pre-tariff buildup earlier this year, and fewer mentions of supply chain shifts and disruptions. However, companies in the transportation sector said activity was volatile amid the ebb and flow of tariff announcements and some customers were shifting their supply chains, particularly within Asia.

  • A further decline in mentions of dividends and buybacks. The latter are tracking a record high, led by tech and financials, but the overall buyback yield (buybacks divided by price) was less impressive.

  • Tech unsurprisingly led the increase in mentions of artificial intelligence (AI) and machine learning, but many other sectors recorded a notable increase.

  • Financials fully accounted for the increase in cryptocurrency and blockchain mentions amid a clearer and more favourable regulatory environment.

Mentions of cryptocurrency and blockchain rising in financial sectors

Mentions of cryptocurrency and blockchain rising in financial sectors

As of 18/13/2025 for calls in Q2 2025. Sources: Bloomberg, RBC GAM

Overall, some return to business as usual and less consternation about tariffs and a potential economic slowdown is a welcome development. It seems consistent with easing recession fears and a partial rebound in business and consumer confidence measures.

However, tariffs are still having a significant impact on the profit margins and bottom lines of many companies. We continue to question how long this margin pain will be tolerated and see risk of greater tariff passthrough to consumers as tariff rates settle at a relatively high level for the foreseeable future. Indeed, July’s U.S. producer price data, which showed a significant increase in retail and wholesale trade margins, is a step in that direction (see chart below).

U.S. wholesale and retail margins are increasing, suggesting more tariff passthrough to come

US wholesale and retail margins are increasing suggesting more tariff passthrough to come

As of July 2025. Sources: BLS, Macrobond, RBC GAM

-JN

Business cycle scorecard

Our U.S. business cycle scorecard has now received its third-quarter update (see next chart). The model uses several dozen inputs to assess the most likely stage of the business cycle.

U.S. business cycle scorecard

US business cycle scorecard

Overall, “end of cycle” remains the best single estimate of the location of the business cycle, though “late cycle” attracts nearly as many votes and “mid cycle” also receives a significant vote share. While we do no not forecast an outright U.S. recession in the near term, we do continue to brace for a palpable economic deceleration over the next few quarters. The business cycle model’s current inclination toward fairly-late-in-the-cycle readings may be picking some of this up.

While the business cycle scorecard is still a useful exercise and speaks to an economic expansion that appears fairly old, it is probably less useful than usual. This is for two reasons.

  1. The scorecard isn’t showing much conviction – the allocation of votes is unusually dispersed, and no single phase of the cycle is really dominating.

  2. Public policy decisions – tariffs, tax cuts, and so on – are presently dominating the economic outlook. The more natural undulation of the economic cycle is playing only a secondary role.

Separate from the business cycle scorecard but still useful as a gauge for the cycle, our collection of U.S. recession models indicates that the odds the U.S. is already in a recession have fallen substantially over the past quarter and are now fairly low (see next two charts).

U.S. recession fears fading

US recession fears fading

As of July 2025. Based on RBC GAM model which includes financial and macro factors. Shaded area represents recession. Sources: Haver Analytics, RBC GAM

U.S. recession no longer trending

US recession no longer trending

As of August 2025 (partial data used for the month). The number of Google web searches for the topic relative to the total number of searches on Google over time is scaled and normalized to arrive at the search interest over time. Shaded area represents recession. Sources: Google Trends, Macrobond, RBC GAM

Forward-looking recession models still assign a non-trivial recession risk, but these have broadly declined as well (see next two charts).

The probability of U.S. recession within a year has fallen

The probability of US recession within a year has fallen

As of July 2025. Based on RBC GAM model which includes financial and macro factors. Shaded area represents recession. Sources: Haver Analytics, RBC GAM

Yield-curve based U.S. recession risk is down from last year

Yield curve based US recession risk is down from last year

As of July 2025 for NY Fed model, RBC GAM estimates as of 08/06/2025. Probabilities of a recession twelve months ahead estimated using the difference between 10-year and 3-month Treasury yields. Shaded area represents recession. Source: Federal Reserve Bank of New York, Haver Analytics, RBC GAM

-EL

Updated economic forecasts

Our economic growth forecasts for 2025 and 2026 have recently been updated, yielding a mixed bag of fairly minor adjustments. Spanning nearly all countries, tariff economic damage is expected to arrive slightly later than previously expected – now largely starting in the third quarter, crescendo-ing in the fourth quarter, with a further, more moderate undershoot in the first quarter of 2026.

The U.S. outlook has enjoyed a moderate upgrade, reflecting the smaller-than-expected economic damage from tariffs thus far and the passage of the Big Beautiful Bill, which should generate a modest fiscal boost in 2025 and a larger one in 2026. Canadian growth has also been modestly upgraded for 2025, reflecting lower than feared tariffs – though with a big question mark around the USMCA renegotiations to come.

Conversely, the UK outlook has been moderately downgraded, largely reflecting recent growth disappointments, messy politics and the potential for a fiscal drag ahead. Adjustments in other countries were generally smaller.

Note that the 2025 growth outlook falsely appears stronger than the 2026 outlook for many countries even though the reverse is actually true at the quarterly level (see next chart). Economies held together fairly well over the first half of 2025, flattering 2025’s numbers. The bad handoff from anticipated weak growth at the end of 2025 then sets 2026 up for the appearance of weakness even though there is a significant acceleration assumed over the latter three quarters of the year.

RBC GAM GDP forecast for developed markets

RBC GAM GDP forecast for developed markets

As of 08/17/2025. Source: RBC GAM

Our forecasts are not radically different than the consensus, generally deviating by only a tenth of a percentage point or two. This is to say that we do not anticipate macro surprises being the central market driver. Instead, the questions for investors are whether markets have truly priced in the consensus outlook for an economic soft patch in the quarters ahead, whether the tech boom can continue, and more broadly whether present market valuations are appropriate.

-EL

Quarter-century crossroads

Depending on whether you believe the century started in 2000 or 2001 (recall that there was no year zero), we have either just finished or are about to finish the first quarter of the 21st century. That calls for a macro-themed retrospective, and also a look forward to what the next quarter century might bring.

The first quarter century: 2000 to 2024

Key themes:

  • The rise of China must surely figure centrally in the first quarter of this century. China was admitted to the World Trade Organization in 2001. It has since enjoyed a rocket-fueled ride, taking over a large swath of global manufacturing and massively increasing its own standard of living along the way.

  • To a less prominent degree, the first quarter century also saw a significant advance across many emerging market nations, to the point that such countries now generate 60%-plus of global economic output on a purchasing-power-parity basis (and around 40% on a market-exchange-rate basis).

  • Alongside this, globalization remained a powerful force for much of the quarter century, driving global growth, though it waned considerably over the final decade as Brexit and the introduction of U.S. tariffs marked a significant late reversal.

  • It was a quarter century in which the tech sector dominated, with the internet blossoming and smartphones revolutionizing daily life.

  • Demographics were already souring at the beginning of the quarter century, but the ball really got rolling in the late 2000s. A range of countries are now experiencing outright shrinking populations.

  • Somewhat less glamorously, and with a number of shuddering speedbumps along the way, the Eurozone project went from its early stages to expansion. Remember, the European Central Bank was just a year old in the year 2000 and the physical euro was not introduced until 2002.  The European Union (EU) has since expanded from 11 to 20 countries, issuing common debt, devising bailout mechanisms, centralizing banking supervision, and now engaging in efforts to coordinate energy and military decision-making.

  • Households leveraged themselves significantly over the first part of the quarter century, at which point the public sector broadly took over, borrowing extensively through the latter part of the quarter century. The bottom line is that quite a lot of debt has accumulated.

  • There was a commodity supercycle, in significant part because of China’s rapid growth and ravenous appetite for raw materials.

  • The U.S. stock market performance over the quarter century – crucially defined in this case as January 1, 2000 to December 31, 2024 – was actually fairly pedestrian relative to earlier eras (see next chart). If that seem surprisingly low, recall that it was a tale of two time periods, with a lost decade in the 2000s followed by pretty remarkable gains since then.

S&P 500 total return has been moderate since 2000

S&P 500 total return has been moderate since 2000

As of 08/18/2025. Total return estimated using price index levels from Bloomberg and Robert J. Shiller’s data and dividend yield data from Bloomberg and Multpl.com. Sources: Robert J. Shiller, Bloomberg, Multpl.com, RBC GAM

  • Bond yields generally declined over the quarter century, with the exception of a sharp upward tilt in the final few years.

Key events that have since substantially faded:

  • The dot-com bubble burst in the very early part of the quarter century, contributing to a mild economic downturn.

  • The War on Terror dominated American foreign policy post-9/11 and into the 2010s, but the geopolitical and military focus has since shifted elsewhere.

  • The U.S. experienced a housing bubble and then a housing crash, followed by a financial crisis that prompted the significant tightening of banking regulations (now seemingly on the cusp of being reversed). Economic growth was unusually slow in the years after the financial crisis as private-sector deleveraging took place.

  • The European sovereign debt crisis of the early 2010s was a massive test for the European Union, which managed to survive it. The countries most challenged at that time are today some of the fastest growing economies within the union.

  • The pandemic massively upset life and economic activity, with some lingering effects including the persistence of working from home, diminished downtowns and higher public debt.

The next quarter century: 2025 to 2049

It is of course a matter of great speculation what the next quarter century may bring. We flag a few potential themes, broken into three buckets.

Continuation of existing themes:

  • China may no longer be growing at 10% per year, but it still appears capable of generating fairly remarkable economic growth and of taking an ever-more-central role in the world over the coming several decades.

  • As China becomes wealthier and other emerging market economies nip at its heels, the rise of the global middle class should continue, with all of the usual implications in terms of greater consumption, stronger demand for discretionary goods and services, and so on.

  • Demographic challenges are set to intensify, with fertility rates falling and longevity continuing to rise. We forecast that the global population peaks in 2066 – out of the timeframe of the next quarter century, but not radically so.

  • The tech sector looks capable of remaining at the centre of economic growth and innovation, though AI applications could broaden productivity gains to a larger fraction of the economy.

Relatively new themes that may persist:

  • The relatively recent pivot from a hegemonic world to a multipolar world looks likely to be enduring, with China a fierce and formidable competitor for the U.S.

  • The recent pivot toward deglobalization may persist, if hopefully at a somewhat less frenetic pace than the last six months, as cliques of countries form and nationalization bests multilateralism.

  • The prior rule-based global order appears to be transforming into a power-based order. Strong countries are less likely to heed international norms, and more likely to push smaller countries around. Conflict is likely to increase and military spending is certain to rise. Geopolitical stability declines.

  • AI has now been a central theme for a few years, and shows every ability to remain a central theme – and perhaps even the main economic theme – for years and perhaps decades to come.

  • Climate change is not new, but its effects are starting to become more visible, more problematic, and less easily reversed. Among many possible consequences, migration pressures could mount from the hottest parts of the world.

  • The bond market may remain in its new state of rising alertness after a decade-plus of drowsy indifference. In particular, fiscal excesses may attract greater scrutiny, leading to a relatively steep yield curve and bond yields that are not as low as during the 2010s.

New themes:

  • U.S. exceptionalism is likely to diminish somewhat. While the U.S. economy will probably still continue to grow faster than most of its developed-world peers, the growth advantage may not be as great as it has been in recent years. U.S. immigration is down and public policy decisions could undermine a fraction of the country’s long-term growth. Conversely, other countries have been startled awake by recent events, and are re-prioritizing economic growth. Given American political polarization, debt levels and changing posture toward the rest of the world, the clout of the U.S. dollar and the Treasury market may decline somewhat over time.

  • We budget for faster global productivity growth in the decades ahead, given a confluence of exciting and potentially revolutionary technologies, including AI applications in natural language processing, robotics and sensing (combined to great effect in self-driving cars), health care innovations and beyond. It remains to be seen whether the demand for human labour will decline at the economy-wide level, but if so there would be far-reaching consequences.

  • Oil demand is expected to peak around 2029-2034. That doesn’t mean that oil drilling will grind to a halt – the decline rate on existing wells is such that exploration will have to continue for the foreseeable future. It also doesn’t guarantee that oil prices will fall, as that depends on the sensitive interplay of supply decisions against projected demand. But it does mark a significant change, and one of substantial relevance to a number of industries.

  • Not that these countries are unimportant today, but India and a number of Southeast Asian nations appear to be on the cusp of really making waves in the global economy over the coming decades given their large populations and rapid growth. Africa should also start to become more relevant, though its biggest impact may be saved for the second half of the century.

  • In financial markets, one might imagine the stock market generating more modest equity returns than over the past few decades given limits to how much further valuations can rise, and perhaps also how substantially profit margins can rise from here. But rapid productivity growth should remain an important support.

-EL

Data quality and politicization concerns

The latest U.S. jobs data for July was broadly disappointing. Hiring fell short of expectations, the unemployment rate increased, and labour force participation fell. But the most discouraging data point was a staggering 258,000 downward revision to job growth over the prior two months. Outside of the pandemic, that represents the biggest markdown in decades. The payroll data now indicates hiring has slowed considerably with job gains averaging just 35,000 over the past three months. A shift of this magnitude requires some explanation.

Monthly payroll revisions are a standard procedure. The Bureau of Labor Statistics (BLS) leaves its payroll survey open for two months after the data is initially reported, and about one-quarter of eventual respondents miss the first deadline. As additional responses come in, the numbers are adjusted for the prior two months. Over the past 45 years, the average absolute two-month revision has been around 75,000 (adjusted to today’s payroll level).

July’s revision still stands out, although nearly half of it was due to downwardly adjusted state and local education employment – undoing the questionable surge in hiring that was initially reported – as schools responded late to the payroll survey.

Payroll revisions are cyclical: as the chart below shows, they tend to increase during recessions. The BLS’s models to impute missing data can be misleading at payroll turning points, and larger swings in employment during an economic downturn also naturally result in larger revisions. Because the payrolls data is tabulated from a sample of businesses, the BLS must also estimate how many new businesses were created and how many were destroyed – numbers that can swing substantially at economic turning points. Revisions may disproportionately reflect small business employment, which is more cyclical, as smaller firms with fewer resources (like a dedicated payroll department) are more likely to miss the initial survey deadline.

U.S. payroll revisions tend to increase during recessions

US payroll revisions tend to increase during recessions

As of 08/06/2025. Sources: BLS, National Bureau of Economic Research, RBC GAM

The U.S. economy is not in a recession, nor do we think it is heading into one. But payroll growth appears to be slowing, and several surveys point to waning labour demand amid rising trade policy uncertainty. To the extent smaller firms are less able to manage tariff impacts through compressing margins or finding alternative suppliers, they could be slowing hiring to a greater extent, causing payroll revisions to be biased lower. Outside of education, trade-exposed sectors were key contributors to the recent downward revisions.

There is also a structural element to revisions. As the previous chart shows, the magnitude of revisions had generally declined over the past several decades amid new methods for data collection and refined modeling techniques to adjust for non-responses. But that trend has reversed more recently, even outside of large pandemic-era revisions. That has coincided with a decline in payroll survey response rates to around 43% from roughly 60% pre-pandemic.

Unfortunately, that trend isn’t confined to the payroll survey – as the chart below shows, many BLS surveys have seen a decline in response rates. The CPI commodities and services survey has seen its response rate dip to 52% from around two-thirds a decade ago.

Payroll survey response rates have dropped over the past decade

Payroll survey response rates have dropped over the past decade

As of July 2025. Sources: BLS, Macrobond, RBC GAM

This issue has been exacerbated by funding cuts at the BLS. The agency’s budget has shrunk by 18% (adjusted for inflation) over the past 15 years, and there has recently been a hiring freeze. That has forced the BLS to reduce CPI sample collection in some areas, which it says is impacting data quality for sub-national or item-specific price indices. The share of missing prices that had to be imputed using prices from a different region increased to one-third in June and July from around 10% a year ago. Funding cuts also limit the BLS’s ability to devise and test new methodologies to make up for declining survey response rates.

BLS firing adds to data quality concerns

President Trump, displeased with downward revisions to job growth that suggest a growing toll from tariff and immigration policies, fired the BLS commissioner shortly after July’s payroll report. Trump claimed the jobs numbers were “rigged” to make him look bad, and that the commissioner, appointed by Biden, “faked” jobs numbers before the election to boost Harris’s chances of victory.

The commissioner’s firing raises serious concerns about the BLS’s independence, much as there are new concerns about the independence of the Federal Reserve – discussed in our last #MacroMemo. Even if the agency’s roughly 2,000 staff remain committed to data integrity, perceived politicization at the top could cause investors to question the veracity of key economic data. This is a worry more often associated with some emerging market economies where governments have a track record of meddling in statistics agencies. That could have a chilling effect on investment in the U.S., increasing equity and Treasury risk premiums.

More broadly, American households, businesses, and lawmakers rely on economic data to make good spending, investment, hiring and policy decisions. Inflation data informs cost-of-living adjustments to social security and food stamp payments as well as tax brackets, deductions, and benefit thresholds. Interest and principal payments on more than $2 trillion in Treasury Inflation-Protected Securities (TIPS) are linked to the BLS’s CPI data.

The good news for economists and analysts is that a growing body of alternative data sources can supplement official statistics. PriceStats, for instance, which is part of the Billion Prices Project, uses web scraping to provide near-real-time inflation data. ADP, a payroll services firm, publishes its employment report two days before the BLS’s payroll data. It doesn’t have a particularly strong track record of predicting payroll releases, although considering recent payroll revisions, it has provided a better read on the job market than the initially reported BLS data.

We think these alternative indicators have value in their own right – not just as predictors of official data but as a separate assessment of the underlying variables being measured. These independent estimates will become increasingly important if the integrity of government data is called into question. However, the privatization of economic data – some of these indicators are behind a paywall – raises its own concerns.

PriceStats and ADP’s employment report have been around for more than a decade, but the pandemic saw an explosion of alternative indicators as analysts and policymakers clamoured for the most up-to-date data to assess a rapidly changing economic backdrop. Their proliferation was aided by new techniques for data collection and analysis, including web scraping, location tracking, transaction data and natural language processing. Along with AI and improved modeling, the toolkit for economists and analysts continues to grow, compensating somewhat for data quality issues affecting official statistics.

-JN

Interested in more insights from Eric Lascelles and other RBC GAM thought leaders? Read more insights now.

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