US Midyear Outlook: Geopolitical Shocks, the New Fed Era, and Growth

With a newly installed Fed chairman, a surprisingly soft inflation print, and persistent geopolitical tensions, what are the implications for US inflation, growth, and Fed policy ahead? I'm Alison Nathan, and this is Goldman Sachs Exchanges. Here to break it all down is my colleague from Goldman Sachs Research, David Miracle, our chief US economist. David, welcome back to Exchanges.

Thanks, Alison.

It's been a little while since I've had you on the show, David, so thanks for joining. And I just do, for that reason, really want to start wide. So here we are in July. If we think about the many twists and turns that we've had so far this year, maybe just start us out with what about the performance of The US economy has gone just as you expected? And maybe more interestingly, what has surprised you the most?

Sure. I don't know that anything's gone just as we expected, but on the surprises, let me give you a good one and a not so good one. On the good side, I would say maybe a big surprise was after we barely created any jobs for the better part of a year, all of a sudden, in the aftermath, somewhat puzzlingly, of a war breaking out and oil prices spiking, job growth has picked up a lot over the course of the last four months. The labor market now looks fairly different than it did to us at the beginning of the year. That was something we had been a little bit worried about, and now that concern, a

Let's stick with inflation. Of course, that is tremendously in focus. We actually did, though, have a pretty weak inflation print last week. The June CPI came in weaker than expected. What do you make of that? How much does that actually suggest to you an inflection point in inflation as you've been expecting, or is this just a mechanical shift that's gonna reverse because gasoline prices, as we all know, went down and now they're headed up again?

I think that probably was a bit of an outlier print, and I wouldn't say it greatly changed our view on the inflation path, but for a number of reasons, we do think that is the start of what will be a run of softer inflation data than we saw, say, over the prior six months. One issue is that the tariff effects now seem pretty negligible on a go forward monthly basis. Another issue is that while there has been reescalation recently in the war with Iran and higher oil prices, they are still down quite a bit from those late AprilMay peaks that we saw, and so it looks there too like the biggest eff

But let me just dig in for one moment there on the re escalation of the war. You're not concerned about the inflation risks.

I think if oil prices stay where they are, then we would continue to expect softer monthly sequential inflation. Absolutely, though, that is the key upside risk to inflation. I would say net of the effects of tariffs, the war, and these AI effects, actually inflation's been reasonably close to 2% for a while at this point. The CPI, certainly, if you take out even just tariff effects, is running close to 2% on a core basis. These effects on PCE, I would say, are worth a little bit more than a percentage point. So there, too, I would say, if it weren't for these factors, we'd be reasonably close

So we do have a Fed meeting next week, very much in focus. It'll be the second meeting for new Fed chairman Kevin Worsch. And despite this softer inflation data and at least our expectation that inflation is going to continue to soften for the second half of the year, he has a pretty cautious tone right now, at least in terms of his congressional testimony last week. And then you've seen other members of the