In physics, force is an influence that causes an object to speed up, slow down or change direction. It is essentially a push or a pull resulting from the interaction between two objects, as described by Newton’s laws of motion. Sometimes forces oppose one another, creating friction or resistance that holds back the movement of an object. This is apt when considering the impacts of the Trump administration’s policy agenda, which has generated various opposing forces on economic growth this year. An initial tariff force pushed the S&P 500 Index 18.9% below its February peak in the aftermath of Liberation Day. However, different policy forces expected to positively influence economic and earnings growth in the months ahead helped to pull equities back to new all-time highs by late June.
The first of these positive policy forces is the decline of an unfavorable one, with tariff rates coming down from their announced levels on Liberation Day and trade deals beginning to materialize with the U.K., China and Vietnam. Passage of the One Big Beautiful Bill Act (OBBB) has represented a second and larger positive policy force, along with a third in the form of renewed prospects of interest rate cuts from the Federal Reserve.
Taken together, the positive forces should outweigh the negative, although the impact from the OBBB and any rate cuts remain future considerations while the tariff headwinds exist today. As a result, the economy could experience a soft patch in the interim, which may already be showing up in housing, business investment and consumption data.
We do not believe this soft patch will metastasize into a recession given the coming positive policy forces, primarily from the passage of the OBBB on July 2.
For signs of that soft patch, we are keeping an eye on initial jobless claims, which measures the number of first-time filers for unemployment benefits and thus provides a good reading on how many job losses may be occurring at any point in time. We place extra emphasis on this specific indicator due to its strong track record, high frequency (weekly release), and the fact that it typically sees only minor revisions, meaning the data can be largely taken at face value. However, initial jobless claims have followed an unusual seasonal pattern in recent years, with an early summer pickup followed by a drop as back-to-school hiring occurs.
As a result, we are focusing on the non-seasonally adjusted initial claims data relative to the same week from prior years, which provides a better reading than the headline and seasonally adjusted figures in our view. Through this lens, the data looks less concerning, and we believe investors should look past the noise emanating from this typical summer swoon.
The health of the labor market is likely to remain a key focal point in coming quarters as investors assess the health of the U.S. economy and the prospect for Fed rate cuts. However, the market may need to recalibrate its view regarding the “normal” level of job growth. The pace of job creation has been slowing since the exit from the pandemic, with a monthly average of 216k in 2023, 168k in 2024 and 130k in the first half of 2025. Looking ahead, consensus expectations are for average monthly job growth of 74k in the second half of the year.
A drop below 100k would have been viewed as a negative as recently as a few months ago, but headwinds from DOGE-related layoffs, an aging population and reduced immigration flow all suggest that job creation below 100k may become the “new normal.” A slowing pace of job gains isn’t atypical as an economic cycle matures, but at the same time it also doesn’t mean that the cycle has ended.
The combination of a soft patch and a maturing cycle could lead to renewed recession fears. This may be amplified by near-term volatility in economic data that is likely to result from the pull-forward and subsequent “air pocket” in demand that have occurred around tariffs. The primary cause of the negative first-quarter GDP reading was a huge surge in imports as companies and individuals rushed to bring goods into the country ahead of Liberation Day. A rise in imports is a negative for GDP, and in the first quarter the contribution was an astounding -4.7% to overall economic growth.
Looking ahead to the second-quarter GDP data that will come out July 30th, imports are likely to plummet as businesses and individuals work through the extra stock/inventory they brought in ahead of the increase in tariffs, which should boost measured GDP as the drag from imports declines. Alternative or “core” GDP concepts such as Real Final Sales to Private Domestic Purchasers, which strips out volatile trade (imports and exports) and inventories, along with government spending, which is less relevant to equity markets, are likely to provide a better near-term reading on the underlying health of the U.S. economy. This measure has been running at 2.6% over the past two years and the first-quarter reading was consistent with the lower end of that trend at 1.9%.
In the coming quarters, tariff distortions should give way to tailwinds from positive policy forces, namely the tax cuts included in the OBBB. The legislation is expected to generate a peak fiscal impulse of approximately 1% of GDP in 2026, on top of the extension of the 2017 Tax Cuts and Jobs Act tax cuts. Individual tax cuts should begin to be felt by early fall as withholding tables are adjusted for no taxes on overtime or tips, while the bulk of the impact will occur in the first half of 2026 when individuals complete their tax returns.
However, corporate tax filing season actually occurs in the fall (September 15 corporate deadline) and many of the OBBB corporate tax provisions are retroactive to January 1, meaning the corporate tax impacts are likely to begin appearing this quarter. These include expensing for factories and a larger R&D credit, both of which should help spur economic growth.
The OBBB is not cost free — the Congressional Budget Office (CBO) estimated that the initial version proposed by the Senate would add $3.3 trillion to the deficit over the next 10 years, leading to renewed fears about federal debt sustainability. While the final cost of the bill will be different, it appears unlikely to be less than the $2.8 trillion in revenue the CBO estimates tariff changes will bring in over the same period. Although the U.S. deficit is on an unsustainable path, we believe the outlook over a five-year investable horizon is manageable, meaning these concerns are likely to flare up but remain secondary in the coming years.
Jeffrey Schulze, CFA, is Director, Head of Economic and Market Strategy at ClearBridge Investments, a subsidiary of Franklin Templeton. His predictions are not intended to be relied upon as a forecast of actual future events or performance or investment advice. Past performance is no guarantee of future returns. Neither ClearBridge Investments nor its information providers are responsible for any damages or losses arising from any use of this information.