The “One Big Beautiful Bill Act” will help U.S. growth regain traction in 2026 as new tax cuts come into effect. The bill extends or makes permanent some “temporary” tax cuts passed in 2017; reinstates capex incentives like bonus depreciation; reduces taxes on individual incomes, tips, overtime, and inheritances; and increased tax deductions for SALT taxes and car loan interest.
These are partially funded by higher tariffs; cuts to Medicaid, SNAP, Obamacare, and student loan programs; earlier phaseouts of subsidies for renewables and EVs; and sales of oil and gas drilling leases. The tax cuts will reduce fiscal revenues more than the spending cuts reduce outlays, so the package adds to the fiscal deficit—i.e., fiscal stimulus. As a result, the deficit is forecast to increase from 6.5% of GDP in the 2025 fiscal year to 7.0% in 2026 and 2027, prolonging upward pressure on long-term interest rates.
The economy could use a shot in the arm after a wobbly second quarter. May saw an unusually broad-based decline of economic activity, with drops in retail sales, industrial production, housing starts, building permits, new home sales, construction spending, personal income, and personal consumption expenditures. Real GDP likely returned to growth in the second quarter of 2025 after a mild contraction in the first, but this was more due to a drop in imports than to stronger consumer or business demand.
While tariff hikes still seem likely to raise inflation in the second half of the year, their impact will be partially offset by less energy and shelter-cost inflation. Following the truce between Israel and Iran, U.S. gasoline and diesel prices are down about 5%-10% from a year ago.
Residential rents and housing prices are much less inflationary than they were a few years ago. Housing supply is up as more existing homes are listed for sale, and rental vacancies are above pre-pandemic levels. High mortgage rates have housing demand in check. Comerica’s July forecast revises down the outlook for inflation in the second half of 2025 to account for less price pressure from these sources.
The June jobs report had solid headlines, with a decent increase in payrolls and a downtick in the unemployment rate. Its details weren’t as strong—the unemployment rate declined in part because the labor force participation rate pulled back to the lowest since late 2022, declining among workers aged 16 to 24 and over 55.
Even so, the lower unemployment rate will make the Fed comfortable holding rates steady at their July decision. Comerica forecasts for the Fed to hold rates unchanged through late 2025, then make a quarter percentage point rate cut at the December decision. The Fed slowed its balance sheet reduction to a monthly limit of $5 billion in Treasuries and $35 billion in mortgage-backed securities (MBS) in April. They will likely continue reductions at this pace until April 2026, then hold the balance sheet steady and begin reinvesting maturing MBS into Treasuries.
Bill Adams is a senior vice president and chief economist at Comerica Bank. Waran Bhahirethan is a vice president and senior economist at Comerica Bank.
