UBS warns US economy faces demand-driven slowdown amid weak growth and rising tariffs

UBS Global Research has sounded the alarm on a potential “stall speed” slowdown in the U.S. economy as signs of weakening domestic demand and labor market momentum raise concerns of a prolonged period of subpar growth. The Swiss bank’s latest analysis highlights that the U.S. economy is slowing in mid-2025, with real GDP expanding at an annualized rate of just 1.2% in the first half of the year, a sharp decline from the stronger growth seen in 2023 and early 2024 [1]. Sequential weakening has become increasingly evident, particularly in domestic demand, which has dropped from above 3% to roughly 1% in recent quarters [1].

Labor market indicators are also showing signs of fatigue. Nonfarm payroll growth has slowed significantly, with July 2025 adding just 73,000 jobs—far below expectations—and previous months' data were revised downward [1]. The three-month average for job gains is now only 35,000 per month, a rate the Fed has labeled as "stall speed." The unemployment rate has climbed to 4.25%, the highest since 2021, and broader measures of labor underutilization, including the U-6 rate, remain elevated. UBS points out that the slowdown is not primarily due to population or immigration constraints, but rather a shrinking labor force participation rate, particularly among certain demographic groups such as Black Americans and teenagers [1].

The firm’s analysis also challenges the Federal Reserve’s recent assertion that immigration is limiting labor force growth. UBS argues that the data from both the Household and Establishment Surveys do not support this claim, and instead indicate that the labor market is slackening due to weakening demand [1]. This distinction is critical, as a demand-driven slowdown calls for a different policy response compared to a supply-side shock, which typically involves more inflationary pressures and price volatility.

Looking ahead, UBS warns that the upcoming wave of tariff increases will likely add further downward pressure on economic growth. The weighted average tariff rate (WATR) is expected to rise from around 16% to approximately 19% in early August, with potential drag on GDP estimated at 0.1 to 0.2 percentage points over the next year [1]. The new tariffs—ranging from 35% on Canadian imports to a 15% rate on EU goods—are expected to directly affect key industries such as automobiles, semiconductors, and pharmaceuticals. UBS estimates that core inflation, currently at 2.8%, could rise to as high as 3.4% by year-end if these tariffs are fully implemented [1].

Amid these headwinds, UBS has maintained its forecast that the Federal Open Market Committee (FOMC) will cut interest rates by 25 basis points in September and by as much as 100 basis points before the end of 2025 [1]. The analysis suggests that the Fed is increasingly likely to act to ease monetary policy in response to the softening economy, even as Chair Jerome Powell has offered limited forward guidance and emphasized the need to evaluate incoming data before making a decision.

Overall, UBS concludes that the U.S. economy is entering a clear slowdown, with fading domestic momentum, cooling job gains, and the looming impact of higher tariffs likely to further dampen the outlook. The firm argues that the data show a demand-driven deceleration rather than a supply-side problem and that policymakers must prepare for a more proactive response to support a soft landing.

Source: [1] UBS sounds the alarm on 'stall speed' as the economy shows signs of running out of gas (https://fortune.com/2025/08/05/how-bad-is-economy-stall-speed-ubs/)