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America’s economy is, by most headline measures, still expanding. Growth in the second quarter of 2025 clocked in at a healthy 3% annualised rate. Inflation, though a touch stubborn, has not spiralled out of control. And the average American consumer, long the ballast of global demand, continues to spend with surprising vigour. But beneath the surface, a more precarious situation is taking shape. The recovery is slowing. The labour market is wobbling. And the full impact of President Donald Trump’s tariffs have yet to land.
For now the economy is intact. GDP rose by 1.2% in the first half of the year, a noticeable step down from 2024’s 2.5% pace, but hardly calamitous. Corporate profits have held up. Household balance sheets are relatively strong. And the banking sector is broadly stable. The problem is not where the economy stands but where it may be heading.
Start with trade. In early August the Trump administration sharply increased tariffs on nearly all of America’s major trading partners. Tariffs on goods from the European Union, Japan and South Korea jumped to 15%. Rates for Canada jumped to 35% and for Brazil and India, 50% . China, the administration’s chief bête noire, faces the threat of even steeper duties unless negotiations bear fruit. The average effective tariff rate, once a tiny 3%, is now expected to rise above 10%, possibly higher.
Thus far, the inflationary consequences have been muted, but not invisible. Headline consumer prices rose 2.7% in June compared with a year earlier, while the core index ticked up to 2.9%—above the Federal Reserve’s 2% target, but not dramatically so. The composition of price increases, however, is telling. Larger household purchases like furniture, appliances, tools and children’s items have seen disproportionate jumps. These are precisely the goods most exposed to global supply chains and, by extension, new import taxes.
Supporters of the tariff strategy insist it is a temporary adjustment on the path to fairer trade. They argue American manufacturers, if given time and protection, will regain lost ground. But that thesis is largely untested. What is more readily observable is the squeeze being placed on small retailers, logistics firms as well as middle-income households, groups with limited capacity to absorb rising input costs.
The labour market too is showing signs of fatigue. July’s job gains, at just 73,000, were well below expectations, and previous months were revised down by a combined 258,000. Though unemployment is still low by historical standards, the sharpness of the revision caught many economists off guard. It also complicates the Federal Reserve’s already difficult balancing act. The central bank must weigh the risks of entrenched inflation against the danger of over-tightening into a softening jobs market.
Fed officials for their part have stressed the presence of “two-sided risks”, meaning both inflation and unemployment may move in the wrong direction at once. Interest rates are high by post-pandemic standards, in part because the Fed was late to react to early inflationary signals in 2021–22. Now it is wary of repeating past mistakes, even as political pressure mounts to cut rates.
The administration meanwhile maintains an upbeat tone. President Trump has proclaimed America’s economy to be the “richest you’ve ever seen”, and his advisers point to consumer strength as proof that the tariffs are working. Yet even they concede that more clarity will emerge only in the autumn, once businesses have had time to recalibrate their pricing strategies and global supply chains begin to adjust—or fragment further.
There is reason to think the economy may avoid outright recession. Forecasts for the second half of 2025 suggest flat growth rather than contraction. A “soft landing”—where inflation fades without triggering mass layoffs—is still in play, though more by luck than design. But for many Americans, the reality on the ground is less reassuring. Wage growth has slowed. Real incomes are stagnant. And price increases are clustered in precisely the areas that households notice most.
The resilience of the American consumer is impressive, but resilience is not the same as invincibility. Higher tariffs, weaker hiring and persistent inflation create a situation that is neither disastrous nor desirable. Voters may be less swayed by claims of riches than by the erosion of purchasing power.
Economists have a term for this sort of malaise: “stall speed”—when growth is positive but insufficient to generate momentum. That is where the United States now finds itself: still flying, but with little margin for error. ■
