Executive Summary
The Story So Far
Why This Matters
Who Thinks What?
The Congressional Budget Office (CBO) has released its latest economic outlook, projecting an increased stagflationary mix for the U.S. economy through the rest of 2025. The report highlights the competing effects of President Trump’s tariffs and significant tax cuts, which are simultaneously influencing economic growth, labor supply, inflation, and the national deficit.
Economic Growth and Labor Supply Dynamics
According to the CBO, tariffs are anticipated to restrain economic growth by increasing costs for producers and consumers. Conversely, the Republican tax cuts are expected to boost growth through enhanced capital stock and productivity, as well as by increasing labor supply in the long run due to work requirements in the One Big Beautiful Bill Act.
However, the report also projects that President Trump’s immigration crackdown will shrink the labor supply in the short term. This policy is already contributing to a notable slowdown in hiring across the economy, with an average of just 29,000 jobs added per month since June.
Revised GDP and Inflation Forecasts
The CBO’s outlook for the current year shows weaker economic growth than previously forecast. Gross Domestic Product (GDP) is now expected to grow by 1.4 percent this year, a decrease from the 1.9 percent prediction made in January. This revised figure aligns with the World Bank’s June prediction, though the International Monetary Fund had projected 1.9 percent growth in July.
The official budget scorer stated that real GDP growth is 0.5 percentage points lower in the latest projections primarily because “the negative effects on output stemming from new tariffs and lower net immigration more than offset the positive effects of provisions of the reconciliation act this year.” Looking ahead, GDP growth for 2026 is forecast to be higher at 2.2 percent, up from the January prediction of 1.8 percent.
Meanwhile, inflation is projected to rise, with a 3.1 percent increase expected this year and 2.4 percent next year. Both figures represent an uptick from previous forecasts. Recent data from the consumer price index showed annual inflation climbing to 2.9 percent in August, up from 2.7 percent in July.
Impact on Public Deficit and Debt
The CBO report also indicates that Donald Trump’s tariffs and tax cuts are having conflicting effects on the public deficit. The deficit is nearing $2 trillion for the current fiscal year, though it is expected to settle closer to $1.8 trillion by year’s end. The tax cut law is projected to add $3.4 trillion to the national deficit over the next decade and reduce tax revenues by $4.5 trillion.
In contrast, if tariffs remain in place, they are projected to shrink deficits by $4 trillion. Customs duties revenues have recently reached record highs, swelling to $30 billion for August alone, approximately three times the levels observed prior to the implementation of the new trade regime.
In January, the CBO projected that the total debt held by the public would increase from its current level of around 100 percent of GDP to nearly 120 percent by 2035. This earlier forecast, however, did not incorporate the effects of the tariffs.
Investor Concerns and Dollar Movement
Investors and economists have expressed growing concerns regarding the financing of rising U.S. deficits. Warnings have emerged, particularly as the Federal Reserve faces increasing political pressure from the Trump administration, about the potential for monetization of the public debt. Such a scenario could trigger capital flight from the U.S., similar to the surge in bond yields observed in April when President Trump first announced his new tariffs.
Harvard economist Jeffrey Frankel stated, “We may have exhausted global investors’ willingness to accumulate limitless Treasury bills at low interest rates. The U.S. may become like others, where eternal deficits eventually require monetization and currency depreciation.”
Adding to the complexity, the DXY dollar index has depreciated by about 11 percent since the beginning of the year, while the nominal broad dollar index is down approximately 7 percent. This depreciation has puzzled economists, as tariffs are theoretically expected to boost domestic currencies rather than erode their value.
The latest CBO outlook underscores the intricate and often contradictory economic consequences stemming from President Trump’s key policies, presenting a challenging landscape for policymakers as the nation navigates these competing forces.
