The Congressional Budget Office now expects higher inflation and unemployment this year and slower economic growth, after taking into account President Donald Trump’s tax law, tariffs and lower net immigration.
The nonpartisan CBO’s economic projections released Friday showed the economy will expand 1.4% in 2025, down from a January estimate of 1.9%. Inflation will pick up to 3.1%, nearly a full percentage point higher than the prior estimate, based on the Federal Reserve’s preferred gauge.
The report also shows unemployment peaking at a higher rate of 4.5% at the end of this year. Private forecasters similarly anticipate a slower pace of growth in 2025 before picking up somewhat next year.
The projections, which go through 2028, see growth picking up and unemployment coming down next year thanks to Trump’s new tax laws. Inflation is expected to ease in 2026 as the impact from this year’s tariff increases recedes.
In a report released earlier this week, CBO dramatically reduced its estimates for immigration over the next few years as a result of Trump’s policies. It also lowered its outlook for population growth, largely due to new expectations for Americans to have fewer children. The CBO projects that the US will need to depend on immigration to keep its population from shrinking in 2031, when annual deaths would exceed births.
Job growth this year has slowed significantly, with just 29,000 jobs added to payrolls on average over the last three months. Businesses have grown cautious about bringing on new hires due to heightened economic uncertainty driven by Trump’s tariffs. As employers have slowed down on hiring, it has become increasingly difficult for unemployed people to find a new job, with the jobless rate rising and applications for unemployment benefits trending higher.
Fed officials so far this year have opted to keep interest rates elevated as inflation remains above their 2% target and the impacts of tariffs are still not fully known. But policymakers have grown concerned about weakening in the labor market. Investors are increasingly betting on a series of rate cuts for the rest of this year, starting with a reduction next week.
The Fed will also release updated economic projections at next week’s meeting.
CBO typically releases updated estimates for federal budgets, deficits, debt and where it sees the economy heading for the next decade twice a year. The next update is early next year.
© 2025 Bloomberg L.P.
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