UBS Flags ‘Stall Speed’ as U.S. Growth Slows Sharply

UBS has issued a warning that the U.S. economy is approaching “stall speed,” with growth momentum fading, job creation slowing, and trade barriers threatening to erode demand further. The Swiss bank’s outlook points to an economy caught between weakening domestic drivers and policy risks that could tip it into a slowdown.

Growth Deceleration Triggers Alarm

UBS economists report that U.S. real GDP grew at just 1.2% annualized over the first half of 2025, down from 2.3% in the same period a year earlier. More critically, domestic demand is now expanding at less than 1%—a level UBS characterizes as unsustainable given elevated interest rates and consumer debt burdens.

Job creation has slowed materially. The U.S. economy added only 73,000 jobs in July, bringing the three-month average down to 35,000—precisely the level UBS and the Federal Reserve identify as “stall speed.” The unemployment rate has crept up to 4.25%, and broader labor underutilization metrics have shown no signs of improvement.

UBS notes that the issue is not one of constrained supply, but falling participation. The active labor force is shrinking despite rising immigration, indicating a structural weakening in workforce dynamics. This distinction matters for policy: the Fed may need to pivot away from inflation control toward demand stimulation sooner than previously expected.

Tariffs Threaten to Compound Weakness

Rising trade frictions are beginning to weigh on the broader macro outlook. UBS projects that the U.S. weighted average tariff rate (WATR) could rise from 16% to nearly 19% by early 2026, driven by proposed policy changes targeting transshipped goods and retaliatory measures.

While the absolute GDP drag from tariffs may be modest—an estimated 0.1 to 0.2 percentage points—the indirect effects on inflation could be more significant. UBS sees the potential for core inflation to rise from 2.8% to as high as 3.4% if tariffs expand further, increasing the risk of stagflation.

In response, UBS forecasts that the Federal Reserve will begin cutting rates as early as September 2025, with a base case of 100 basis points in easing by year-end. Fixed income markets are already pricing in a significant probability of this scenario.

Markets Rotate into Defensive Positioning

The equity market has begun rotating away from cyclical sectors and into defensives. Consumer discretionary stocks, industrials, and travel-related names have underperformed, while utilities, healthcare, and consumer staples are holding firm.

Rate-sensitive assets are responding accordingly. The U.S. yield curve has steepened slightly at the short end as two-year yields fall in anticipation of easing, while long bonds rally on recession concerns. Traders are also favoring quality credit and duration extension plays in investment-grade fixed income.

Commodities have responded unevenly. Crude oil prices remain firm on supply-side constraints, but industrial metals are showing fatigue, especially copper, amid slowing construction and factory output data.

UBS Highlights a Structural Transition

UBS uses the term “stall speed” to emphasize that this is not simply a soft patch. Like an aircraft flying too slowly to maintain lift, the U.S. economy risks slipping into a low-growth trap where neither employment nor price stability can be maintained. The bank highlights elevated consumer leverage, demographic drag from aging workers, and diminished productivity growth as headwinds that are unlikely to reverse quickly.

The concern is that the Federal Reserve may be forced to respond to weakening growth before inflation fully normalizes, leading to a difficult policy trade-off and heightened market volatility.

Tips for Traders

• Monitor monthly U.S. payroll data closely; job growth below 35,000 is UBS’s stall speed trigger.

• Watch for tariff escalations and revisions to the WATR—these directly affect inflation projections and trade-sensitive sectors.

• Look for signs of Fed policy pivot in public comments and meeting minutes; early confirmation could shift bond yields sharply.

• Rebalance exposure away from cyclical equities and into defensives, including healthcare, staples, and utilities.

• Position in long-duration bonds or quality credit as rate cut expectations firm through Q4 2025.