“It’s hard to figure out what’s happening with the economy right now,” Michael Strain, economist at the American Enterprise Institute, told TMD. “More than is usually the case, to get a handle on what’s happening right now really does require you to look at a pretty broad range of indicators.” Mark Gertler, professor of economics at New York University and co-director of the National Bureau of Economic Research’s Economic Fluctuations and Growth Program, said that uncertainty stems from pressures that are pushing the economy in both positive and negative directions. “The situation is not clear,” he told TMD. “There are offsetting forces.”
On one hand, the Trump administration’s sweeping tariffs are beginning to drive up costs for businesses across the country, especially in sectors such as manufacturing. That cost pressure is keeping inflation stubbornly above the Federal Reserve’s 2 percent target and is giving the Federal Open Market Committee a headache as it weighs lowering interest rates. Coupled with tariffs, the administration’s clampdown on both legal and illegal immigration is challenging industries like agriculture and construction that rely heavily on migrant labor. “There’s no question in my mind that the administration’s economic policies, including most prominently the tariffs, the clampdown on immigration, and the challenging of Fed independence, are creating headwinds for the economy,” Kimberly Clausing, professor of tax law and policy at the University of California, Los Angeles, told TMD.
On the other side of the ledger is the investment boom in artificial intelligence, which is already filtering billions of dollars into the American economy. “AI has contributed to keeping investment up, and potentially keeping the stock market up as well,” Gertler said. “So there is hope there.”
While the narrative surrounding tariffs, immigration, and AI is compelling, how that story is actually unfolding across the economy is a bit more complicated. For one, traditional indicators of economic health, such as GDP growth, unemployment, new job creation, inflation, and stock and bond market performance, are currently a mixed bag. For example, even though August’s 2.7 percent annualized PCE rate—the Federal Reserve’s favored measure of inflation—shows an upward trend in prices, and markets are pointing to inflation remaining above the Federal Reserve’s target for at least the next five years, that rate is still relatively low—and stable—by historic standards. Similarly, while the country’s unemployment rate—4.3 percent in August—remains low, it is still slowly ticking up, especially for black Americans, which could be an early indicator of an economic slowdown. Job creation numbers are also well below expectations, with the country adding only 22,000 new nonfarm jobs in August, according to the Bureau of Labor Statistics, down from 142,000 new jobs during the same period in 2024. (September jobs numbers have not yet been released because of the ongoing federal government shutdown.)
On the GDP front, the Bureau of Economic Analysis announced in September that the U.S. economy grew at a 3.8 percent annualized rate in the second quarter of 2025—a stronger-than-normal pace bolstered by robust consumer spending and falling imports (which detract from GDP). However, economic forecasters expect that growth rate to drop significantly through 2026, with the Federal Reserve Bank of Philadelphia’s August Survey of Professional Forecasters estimating that GDP growth would be only 1.6 percent next year.
While the diversity of the U.S. economy always complicates the overall picture, that’s especially true right now as the Trump administration’s approach to economic policy creates an environment with substantial variability among different sectors. “There are periods of boom and bust in the U.S. economy, where pretty much everything’s rising or falling together, where there’s a common dynamic. People are expanding because other people are expanding, or people are fearful and holding back because other people are fearful and holding back,” Adam Posen, president of the Peterson Institute for International Economics, told TMD. “This is not one of those times.” Instead, Posen explained, the U.S. economy is in an abnormal, yet not unheard-of, period when the performance of different parts of the economy is increasingly divergent. “And, absent financial shock or huge shift in Fed policy or tax policy, that can go on for a long while,” he said.
This divergence, and economists’ uncertainty about the economy, is heightened further by the fact that many of the administration’s policies are only beginning to make themselves felt across the country. “The president’s trade and immigration policies have not hit the economy with full force, and when they do, that’s going to slow the growth rate of the economy, it’s going to slow consumer spending, and it’s going to increase the unemployment rate,” Strain said. “But it’s good news that hasn’t really happened yet.”
According to Yale University’s Budget Lab, the average effective tariff rate on goods imported into the U.S. was nearly 19 percent in August—the highest the country has seen since the Great Depression. But because firms typically price their goods and services based on the cost of their existing inventories, that price pressure hasn’t fallen on consumers yet. “A number of [firms] have inventories that haven’t been affected by the tariffs,” Gertler said. “But as the year goes on, you’re going to feel the effects of the tariffs more and more.” Just how long it will take for those effects to peak depends on who you ask. Posen, for one, doesn’t think the inflationary effects of the administration’s first wave of tariffs will crest until the middle of next year. “It was always going to take a while,” he said.
As those effects take hold, the country will look toward its soaring tech industry, driven by massive investments in artificial intelligence, to make up the difference. “At any given time of strong economic growth, that growth is coming from a small number of sectors,” Strain said. “So to say growth is strong in the third quarter of 2025, but ignoring where the growth is coming from, is not a reasonable way to analyze the economy.” Even if the AI boom turns out to be a bubble, the investment stemming from it is real, and not every tech company with soaring valuations will get burned as the race for AI dominance chugs ahead. “I don’t get worried when one part of the economy is being the locomotive for a given period, I get worried if that part of the economy is doing it either on the basis of huge leverage or on the basis of obviously incorrect valuations, or is heavily dependent on some kind of input or specialized niche market,” Posen said. “None of those are true for the AI-associated investment.”
If TMD could accurately predict exactly where the U.S. economy will be a year from now, we would all be working as hedge fund analysts in Connecticut, not writing this newsletter. But in September economic outlook reports from Ernst & Young, S&P Global, and Wells Fargo all put the odds of the U.S. entering a recession over the next 12 months at between 30 and 40 percent. That’s around twice as high as in a typical year, but still overall far from certain.
Trust seems to be falling among many participants in the U.S. economy, regardless of how American industry performs over the next year and beyond. The value of gold and cryptocurrencies like Bitcoin and Ethereum are at an all-time high—signals that Americans are increasingly wary of traditional assets and worried about inflation. “It tells us that the fundamental breakdown in trust of government and lasting institutions and of government money, whether for fiscal or monetary doubts, is very real and widespread,” Posen said. Since the beginning of the year, consumer sentiment has again been trending downwards following a brief period of recovery in 2022 and 2023. Americans now feel about as negatively about the economy as they did during the stagflation of the 1970s and early 1980s, the Great Recession, and the COVID-19 pandemic.
But for now, the American economy continues to show its resilience, even in the face of policies that many mainstream economists view as self-inflicted harms. “While we’re not in a recession, clearly, I think growth would be a lot stronger if the administration hadn’t enacted their economic agenda,” Clausing said. “The growth we are seeing is something that was sort of baked in due to the AI revolution.” But, in Clausing’s eyes, there is at least some long-term upside to the Trump administration’s tariff and immigration agenda. “I actually think one of the only good things about this chapter is people are going to get a big economics lesson, and they’re going to realize, well, if we care about grocery prices and all these things we claim to care about, we probably shouldn’t drive away labor and raise tariffs,” she said. “Those are, I think, useful lessons that might allow better policy down the road.”