Tariffs and Trade Shocks Were Larger Than Expected
When Donald Trump began his second term, economists widely predicted that aggressive tariff expansion would significantly slow economic growth. Average tariff rates jumped dramatically within months, marking one of the sharpest increases in modern American trade policy. Many analysts believed such moves would either reignite inflation or reduce demand enough to push the economy toward recession.
Yet, while trade costs did rise for consumers and businesses, the overall impact has so far proven less catastrophic than forecast. Retaliation from trading partners has been limited, and many companies adapted through supply-chain diversification and transshipment strategies. The scale of tariff revenue—while meaningful—remains relatively small compared with the size of the $30 trillion US economy, muting its macroeconomic shock.
Immigration Curbs Did Not Immediately Stall Growth
Another major shift involved a sharp decline in net immigration. Historically, the United States has benefited from annual net inflows ranging between 500,000 and 1.5 million people. In contrast, recent estimates suggest immigration fell to near zero or even turned slightly negative.
Many economists warned that labor shortages would intensify, potentially constraining productivity and output. However, while labor market participation has softened, businesses have increasingly relied on automation, AI-driven efficiency gains, and wage adjustments to fill gaps. Unemployment remains below 5%, indicating that the slowdown in immigration has not yet translated into a dramatic contraction in overall employment.
Rising Federal Debt Has Not Triggered Immediate Crisis
The passage of the One Big Beautiful Bill Act significantly increased projected federal borrowing. Over the next decade, public debt is expected to rise by trillions of dollars, prompting warnings about fiscal sustainability and long-term crowding out of private investment.
Despite those concerns, bond markets have absorbed the additional issuance without a dramatic spike in borrowing costs. Risk premia on Treasuries have edged higher, but not to levels historically associated with fiscal emergencies. Investors appear to believe that near-term growth and tax rebates will offset immediate downside risks, even if long-term structural challenges remain.
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Federal Reserve Independence Faces Pressure
The independence of the Federal Reserve has come under visible strain, with public criticism and political pressure directed at its leadership. Economists traditionally view central bank independence as critical for maintaining price stability and investor confidence.
However, markets may perceive institutional safeguards as sufficiently strong to prevent abrupt policy shifts. The Federal Open Market Committee’s voting structure diffuses authority across multiple members, limiting the impact of individual political appointments. As a result, monetary policy has not dramatically deviated from established frameworks.
Stimulus Offsets Negative Policy Shocks
While tariffs and immigration restrictions pose headwinds, other forces have provided offsetting stimulus. Tax rebates and fiscal transfers have boosted disposable income, supporting consumer spending. Goldman Sachs estimates that fiscal measures have contributed modestly to household purchasing power in early 2026.
Simultaneously, looser capital restrictions and pro-business incentives have encouraged corporate investment. Large-scale AI capital expenditure has emerged as a particularly powerful growth driver, contributing significantly to GDP expansion during 2025.
The AI Investment Boom Strengthens Output
Artificial intelligence infrastructure—data centers, semiconductor fabrication, and cloud computing—has accounted for a large share of recent investment growth. According to regional Federal Reserve research, AI-related spending represented a substantial portion of incremental GDP gains.
This technological wave has cushioned the economy against trade and fiscal turbulence. By boosting productivity and efficiency, AI investment may partially offset labor supply constraints caused by reduced immigration.
Economists May Have Overestimated Immediate Effects
One possible explanation for the economy’s resilience is that economists overestimated the magnitude and speed of policy transmission. Trade shocks, immigration declines, and debt expansion often unfold gradually rather than instantly.
Moreover, complex systems like the US economy benefit from diversification and scale. Sectoral weaknesses can be absorbed by strength elsewhere, particularly when consumer confidence and financial conditions remain broadly supportive.
Policy Tradeoffs Complicate Simple Narratives
Trade liberalization historically delivered cheaper goods and expanded markets but also imposed costs on certain industries and communities. Similarly, immigration supports growth but can influence wage dynamics and social services.
Trump’s agenda reshuffles these tradeoffs rather than eliminating them. Tariffs raise revenue and protect select industries, while fiscal expansion boosts demand at the cost of higher debt. The economic outcome reflects the interplay of these competing forces rather than a single linear cause-and-effect chain.
Signs of Subtle Deterioration Appear
Despite resilience, certain indicators have softened. Broader measures of labor underutilization have risen, and inflation remains above the Fed’s 2% target. Treasury yields reflect slightly elevated risk premiums, suggesting markets are pricing incremental uncertainty.
These developments imply that while the economy has not crashed, it is not immune to strain. The cumulative effect of policy shocks may become more visible over time.
Long-Term Effects May Still Unfold
Economic shocks often operate with lags. The Congressional Budget Office has noted that fiscal crowding out and labor market shifts may take years to fully manifest. Similarly, sustained political pressure on the central bank could gradually erode investor confidence if institutional norms weaken.
For now, the US economy continues to expand at a moderate pace, defying dire predictions. Whether that resilience endures will depend on how these policy changes interact over the long term. The coming years may ultimately determine whether 2025–2026 represented a period of underestimated adaptability—or merely the calm before deeper structural consequences emerge.
