Last week, we had the pleasure of hosting a very sharp economist from Vanguard who shared the firm’s latest views on the economy. I found the conversation illuminating because it helped cut through much of the noise we often hear in the financial media.
I’m not suggesting their forecasts are more or less accurate than anyone else’s. That’s an impossible standard, since no one knows what the future holds, especially in the short run. What I value in any economist is a fair presentation of the current facts and thoughtful, reasonable, data-backed expectations about what might lie ahead.
From a growth perspective, Vanguard expects real (inflation-adjusted) U.S. Gross Domestic Product (GDP) to increase by 1.5 percent in 2025. That’s a bit higher than the consensus estimate of 0.9 percent, but lower than the 2.5 percent growth expected in 2024. For 2026, Vanguard projects 1.7 percent growth, slightly below the consensus of 1.9 percent.
My takeaway is that Vanguard sees less downside risk in the near term than others, but also less of a rebound next year. Annualizing this year and next, Vanguard is calling for 1.6 percent annual growth, compared to the consensus forecast of 1.4 percent.
For context, I looked at the data going back to 2002, when we launched Acropolis. Over that period, the average annual real growth rate was 2.2 percent. That includes two recessions: the 2008 Global Financial Crisis and the 2020 Global Pandemic. Excluding those years, the average annual growth rate rises to somewhere between 2.5 and 2.7 percent, depending on how you slice it (my analysis was quick and dirty).
The bottom line is that both Vanguard and the consensus are calling for sluggish growth. Neither sees a recession on the immediate horizon, but no one’s predicting a boom either.
On the inflation front, Vanguard focuses on the Core Personal Consumption Expenditures (PCE) index. While Core PCE differs from the Consumer Price Index (CPI), Core PCE is considered a better measure of underlying inflation and is the Federal Reserve’s preferred gauge, with a 2 percent target.
As of May, the most recent reading for core PCE was 2.7 percent. Vanguard expects it to tick up to 3.0 percent by year-end, primarily due to tariffs, then fall to 2.2 percent in 2026. In other words, they view the tariff-driven inflation as a one-time issue, as does the White House.
A 3.0 percent reading is only 10 percent above the Fed’s target—not ideal, but hardly disastrous. It’s like driving 66 mph in a 60-mph zone. For comparison, in February 2022, core PCE peaked at 5.7 percent, which is more like flying down the highway at 171 mph.
All in all, I appreciated Vanguard’s balanced and data-driven perspective. While their forecasts aren’t wildly optimistic or pessimistic, they offer a grounded view that cuts through the hype, which is precisely what I want from an economist.
Growth may be modest and inflation a bit sticky in the short term, but nothing in their outlook suggests panic or exuberance—just a slow and steady path forward, which frankly sounds about right to me.
How the stock market responds to the data is another question for another day.
