Making a (Base) Case – June 16, 2025
The current uncertainty in the U.S. economic outlook calls for a new approach in assessing it
Looking at a situation in a different way may entail approaching it from a different perspective. Or it may mean a modification to the methodology for assessing it. The latter course is the one Ryan Severino, chief economist with BGO, has taken in the firm’s latest analysis of the U.S. economy.
“The economy and markets continue to deal with extremely elevated uncertainty,” he writes in the Q2-2025 U.S. Economic and CRE Outlook. In BGO’s latest quarterly global economic outlook, he presented base, upside and downside scenarios to address this uncertainty.
Severino writes, “We were planning on doing something identical for this U.S. outlook, but we have taken a slightly different approach given the peculiarities of the challenge we face when projecting the U.S. economy.” This uncertainty centers on U.S. trade policy, “which has the most direct and variable impacts on the U.S. economy. And given that these policy decisions are largely geopolitical and highly unpredictable, it has made conventional forecasting even more challenging than usual.”
To address this challenge, “we are employing a new approach this quarter,” he writes. The new analysis still utilizes the macro scenario model, producing the aforementioned base, upside and downside cases as usual. “But we also built a new machine-learning model based on principles of behavioral economics in order to ascertain the most likely path forward for U.S. trade policy. Again, since these policy decisions aren’t really economic in nature, they call for a somewhat different approach to forecasting.”
The base case, then, is a variation Severino calls the augmented base case. Although not significantly different from the median scenario that generally serves as the base case, the augmented base draws some meaningful insights from behavioral machine learning.
“First, and maybe most importantly, the model forecasts continued use of tariffs, including via alternative legal justifications and court battles,” writes Severino. “The overall effective tariff rate remains elevated relative to the level from March 2025, but not sufficiently high enough to cause a recession.”
Second, economic growth in the augmented case is “slightly lower than the median case, around 1.5%,” he continues. “Third, outside of tariff effects, it continues to see disinflationary forces across the economy, particularly in housing. The overall inflation rate remains roughly 70 basis points (bps) greater than would have otherwise occurred without the increased effective tariff rate. Fourth, the model foresees lower interest rates, with the Fed still expected to cut rates in 2025 despite tariff uncertainty.” It also sees the 10-year Treasury hovering around 4%.
Within this augmented base case, Severino discusses the near-term implications for U.S. commercial real estate. “Space market fundamentals are recovering, but more slowly than they otherwise would.” he writes. “The increased uncertainty is leading users of space to delay decisions on space usage. Tenants and potential tenants are coming under scrutiny in different ways than they have before.”
On the equity capital markets side, Severino also sees some evident strain. “Buyers are requesting longer for due diligence, some deals are repricing, and some deals are falling out altogether,” he writes. “Cap rates, which were largely stabilizing, now seem more tentative with stabilization faltering somewhat in recent periods. Consequently, pricing has retrenched in recent months.
“Relatedly, transaction volume declined during the first quarter and seems relatively flat, thus far, in the second quarter,” he continues. “Yet we are already seeing tentative signs of an increase in activity which portends greater activity ahead.”