The U.S. economy in 2025: Recession Fears Ease, yet the Economy stands at a crossroads, balancing between resilience and uncertainty. In 2025, the US is prioritizing an “American-first” economic agenda characterized by significant policy changes. The One Big Beautiful Bill Act is a U.S. federal statute passed by the 119th United States Congress and forms the core of President Donald Trump’s second-term agenda. The bill was signed into law by President Trump on July 4, 2025.
Central to this bill was the Tax Cuts (TCJA extensions), which will boost disposable income and investment, resulting in growth in the short run, but will cause revenue loss and a deficit in the long term. To balance this, Trump announced tariffs on its major trading partners like China, Japan, the EU, Vietnam, etc. This decision till now proved worse for the American economy.
Tariffs raised revenue but canceled out a big chunk of growth benefits. A hike in tariffs resulted in rising inflation, a fragile job market, high import costs, supply chain disruption, and cooling consumer demand, all of which weigh on momentum. Tariffs reduce long-run GDP by 0.8% (without retaliation). With retaliation (from China, the EU, Japan, etc), the drag could be worse.
During the first quarter of 2025 US economy contracted at an annual rate of 0.3%. Trump blamed his predecessor, Joe Biden, for the economic weakening, maintaining that his policies would drive investment in the US and an economic boom. Due to rising fears of inflation, supply shocks, and a shortage of items as the US-China trade falls sharply, Trump blamed his predecessor for the economic weakening, saying, “This is Biden”.
Businesses will also benefit from lower corporate taxes and investment incentives, but the losses they will incur because of “Liberation Day Tariffs” will have a huge impact. Trump also introduced other policies, such as deregulation of industries, labour laws, immigration, and energy policies. Many of his policies, especially tariffs, sparked a dramatic turmoil in the stock and exchange markets.
US businesses pulled forward their purchases in anticipation of tariffs, higher costs, market volatility, and uncertainty, due to which imports skyrocketed by more than 40% in the first three months of the year, while consumer spending grew 1.8%, though at a slower pace than in 2024. Economists have already warned that tariffs on imports will lead to higher prices. The Trump administration is using tariffs to pay for tax cuts.
Major Tax Changes in Law in 2025 under OBBB:
For People (Households):
- Families can now shield more income from taxes and receive larger benefits for children thanks to the expansion of the Standard Deduction and Child Tax Credit (CTC).
- In places with high taxes, the SALT deduction (State and Local Taxes) is temporarily more generous, relieving some of the burden on taxpayers.
- Stricter guidelines for charitable deductions and a “haircut” on the overall amount of itemized deductions are two new restrictions on itemized deductions.
- The new temporary deductions apply to seniors, tips, overtime compensation, and auto loan interest (but are limited based on income level).
- Estate Tax: In 2026, the exemption level—the amount that can be passed on tax-free at death—was permanently increased to $15 million per person, which means that fewer estates will be subject to taxes.
For companies:
- Permanent full expensing for short-lived assets and domestic R&D allows businesses to deduct these expenses right now rather than allowing them to accumulate over time.
- Production Structures: A one-time deduction of 100% is available for specific physical structures related to manufacturing or production.
- Green energy credits will be phased out gradually, and government subsidies in that industry will be abandoned.
- International Tax Rules: Business-friendly adjustments were made to the overseas tax laws, including the cancellation of planned corporation tax hikes.
Additional modifications to the tax code:
- New tax-deferred savings accounts: These work similarly to retirement accounts in that they let people postpone paying income taxes.
- Child and Earned Income Tax Credit (EITC): New regulations (details not provided, but probably stricter in some situations).
- The excise tax on university endowments has been revised to more effectively target wealthy private universities.
- Remittances: A 1% levy has been added on international money transfers.
Inflation and Economy:
Inflation is the rate of increase in prices over a given period of time. Donald Trump says there’s “no inflation!!!” in America. But official data doesn’t lie. As of July 2025, two key inflation metrics — the Personal Consumption Expenditures (PCE) Price Index and the Consumer Price Index (CPI) — show that prices are still above the Fed’s 2% target, with the core PCE at 2.9% and core CPI at 3.1%. Fed always stressed the importance of “core” inflation, which excludes food and energy prices, which tend to be more volatile and often obscure the underlying inflationary trends that policymakers are focused on. Here is the definition of key inflation metrics:
Consumer Price Index (CPI):
It measures the change in average consumer goods prices over time. Headline CPI tracks all prices, but core CPI strips out food and energy prices.
Personal Consumption Expenditures (PCE):
This measures changes in the price of goods purchased by consumers. It is a bit different from CPI as it takes its data from the BEA’s GDP report and also considers the amount of money households are spending and what they’re spending their money on.
While the CPI measures the costs of various goods, the PCE takes its data from the BEA’s Gross Domestic Product (GDP) report. This means that the PCE arguably covers more of the U.S. economy. Plus, the PCE takes into account how much households are spending and what they’re spending their money on. These factors, among others, are why the PCE is the Fed’s preferred inflation measure.
In the first few months of 2025, inflation slowed down, but due to hype in trade tariffs, businesses started shifting the cost of tariffs on consumers, causing a rise in inflation in the months to come.
Purchasing power and GDP:
Purchasing power is the value of currency to buy goods and services with a specific amount of money. It decreased by 2.92% in 2025 in comparison with 2024, means you need to spend 2.92% in 2025 to buy the same amount of goods. Today’s prices are 1.03 times as high as average prices since 2024, according to the BLS consumer price index. Consumer spending – the primary driver of the US economy – also rose by 1.8%, although the pace was lower than in 2024.
In the first quarter of 2025, GDP declined to 0.5% due to an increase in imports as businesses aimed to get in front of President Donald Trump’s tariffs and a decrease in government spending, the BEA said. But in Q2, GDP increased at an annual rate of 3% and this healthy headline figure was due to a sharp drop in imports.
Causes of Inflation in the U.S. in 2025
Increased Tariffs:
Trump imposed tariffs on foreign goods that have raised production costs and reduced supply. Since demand for many goods remains unchanged—or even higher—businesses pass these added costs on to consumers through higher prices. Tariffs on imported oil, metals, and renewable energy equipment have also lifted gas and electricity costs, intensifying household inflation pressures.
Fiscal Policy:
The proposed One Big Beautiful Bill Act would extend large tax cuts while cutting Medicaid and food assistance. Critics argue that tax relief will benefit businesses and wealthier households, will add trillions of dollars to federal debt, and boost inflation by increasing demand without addressing supply-side constraints.
Expansionary Monetary Policy:
The Federal Reserve introduced rate cuts to lower borrowing costs for households and businesses, to sustain growth. But this encourages more spending on homes, cars, and investments, increasing demand ahead of supply and causing inflation.
With time, strains are starting to show: retail sales are weakening, housing starts have dropped to their lowest since mid-2020, and an immigration crackdown is tightening labour supply.
Higher tariffs, elevated uncertainty, and geopolitical tensions are driving this downward trajectory. So restoring confidence, predictability, and sustainability should remain a key policy priority.
Job Market:
Year 2025 saw a sharp decline in the job market. Due to an increase in tariffs, inflation, economic uncertainty, and a decline in America’s crucial immigrant workforce, the US job market is weakening. According to the latest data from the Bureau of Labor Statistics, just 22,000 jobs were added in August, dramatically lower than economists’ expectations for 76,500 new roles.
Unemployment refers to a situation where individuals who are actively looking for a job are unable to find any job opportunities. Its rate rose to 4.3%, the highest level since 2021. This is because some sectors and companies have started cutting workers to bear the weight of tariffs and inflation. In June 2025, the unemployment rate was 4.1%, the labour force participation rate was 62.3% (down by 0.3), while the employment-to-population ratio declined by 0.4 percentage points to 59.7%, its lowest level since January 2022. The unemployment rate is expected to remain broadly stable, edging up slightly to 4.3% by 2026.
Unemployment for younger Americans:
The unemployment rate for younger Americans aged between 16 to 24 years old rose to 10.5% in August, according to the BEA. In January, it was 9%. So they are having difficulty getting hired in today’s job market. The youth unemployment rate is highest in nearly four years, more than twice as high as the national unemployment rate. For high school graduates aged between 20 – 24 with no college experience, the jobless rate is higher, at 10.8%. That’s up sharply from 8.8% in July. Similarly, for individuals of the same age but with a bachelor’s degree and higher, the rate rose to 9.3% in August, up from 8.6% in July and 4.2% in April.
Even recent graduates are having trouble getting jobs these days. According to 2024 data, many said that they have applied to hundred of jobs but all in vain. Some economists suspect role of AI behind this.
“The ‘low hiring, low firing’ environment has disproportionately hit the younger cohort of new college grads,” Kevin Gordon, senior investment strategist at Charles Schwab, told CNN. “We’re now likely seeing the impact of AI on this cohort, especially as companies start turning to technology to save on costs.”
Wage gains are shrinking:
Job growth and opportunities are cooling for US workers. So are paycheck gains. The annual growth in average hourly earnings slowed from 3.9% in July to 3.7% in August. The annual growth in average hourly earnings was 3.7% in August, a slowing from 3.9% the month before. This is due to broader shifts occurring in the labor market.
“Employers’ continued focus on wage containment amid a slowing economy may lead to a further deceleration in wage growth toward 3.5% by the fall,” Boussour, EY-Parthenon senior economist, wrote in a note Friday to investors.
Trump administration blueprint: A Federal approach to workforce development:
The US Department of Labor, Commerce, and Education on Tuesday released their blueprint to overhaul the federal government’s approach to workforce development.
America’s Talent Strategy:
Equipping American Workers For Golden Age outlines a five-pillar plan designed to expand access to good-paying jobs, strengthen talent pipelines for critical industries, prepare the workforce for an AI-driven economy, and solidify the United States’ position as the world’s leading economic power. The report was initiated due to an Executive Order earlier in the year on preparing Americans for high-paying skilled trade jobs that called for a review of all federal workforce programs. The pillars are:
Industry-Driven Strategies:
Expand apprenticeships and align education programs with career pathways in priority industries to directly meet employer needs.
Worker Mobility:
Identify skills and credentials needed for in-demand jobs and enhance workforce participation. Also, connect and support individuals to help them advance in their careers.
Integrated Systems:
Streamline federal workforce development programs, give states more flexibility, and create an easier access point for workers and employers under the president’s Make America Skilled Again proposal.
Accountability:
Strengthen tracking of results, make programs more transparent, and direct funding towards what actually helps people get good jobs.
Flexibility and Innovation:
Prepare the workforce to thrive in an AI-driven economy by prioritizing AI literacy, developing new pathways into AI careers, and supporting rapid reskilling initiatives and other innovation pilots. The report also touches on the Inter-Agency Agreement (IAA) between the Departments of Education (ED) and Labor (DOL), which entails joint administration of CTE initiatives like Perkins V and the Perkins Innovation and Modernization (PIM) Grant program.
Future PIM competitions will emphasize education-workforce alignment, apprenticeships, innovative work-based learning models, and competency-based hiring, with grant applications requiring support from governors and state workforce boards. Special attention will be given to ensuring equitable access so all communities can share the benefits of an AI-powered economy.
AI in the US Job Market:
The US labour market is transforming due to the rapid emergence of AI. On one hand, this engine is crucial for innovation, productivity, and job creation, and on the other hand, it is a disruptive force capable of automating tasks and displacing workers. AI-related job postings have grown at an average annual rate of nearly 29% over the last 15 years, dramatically outpacing the 11% growth rate for the general economy, according to a Brookings Institution analysis of Lightcast data.
AI has moved beyond Silicon Valley and is no longer limited to tech companies but is deeply rooted in core industries like healthcare, finance, and manufacturing. So demand is growing for professionals with hybrid skills: not only strong technical knowledge in AI, coding, or data, but also human-centric skills like problem solving, ethical decision making, and communication. AI is therefore setting a new blueprint for skills needed to succeed.
AI jobs are growing rapidly in the US labour market. Both established tech hubs and emerging regional ecosystems seek domain experts who also have AI literacy. Jobs demanding AI skills pay 28% more on average (Lightcast report). Average salaries for different jobs include: AI Engineer ($175,000), Data Scientist ($127,000), and Executive-level AI roles ($180,000+). Established hubs with major AI job postings include Silicon Valley, Seattle, and New York City. Emerging hubs include Texas, Massachusetts, and North Carolina. Growth is driven by business-friendly policies, university research programs and remote work flexibility.
Immigration effect on the US job market:
Trump’s immigration strategy has been described as “very aggressive.” The White House has attempted to limit access to asylum, terminate birthright citizenship, and increase and speed up deportations. According to BLS figures, there were 32.1 million foreign-born workers in July, a decrease of almost 1.2 million since January.
Jackson wrote: “There is no shortage of American minds and hands to grow our labor force, and President Trump’s agenda to create jobs for American workers represents this Administration’s commitment to take advantage of that untapped potential while fulfilling our mandate to enforce our immigration laws.”
Because of immigration policy, really, the flow into our labor force is just a great deal slower,” Powell said during a news conference on July 30. Labour force growth is one of the key factors behind economic growth and productive businesses. It would be concerning if the labor force continued to shrink.
According to economists, a smaller labor pool would also result in less tax revenue for Social Security and other government programs, and it may put pressure on employers to raise salaries in order to recruit talent, which could worsen inflation.
A Bank of America Institute analysis released Tuesday, for instance, warned that wage inflation could threaten the construction sector, which already faces labor shortages. According to the survey, the construction industry’s average wage growth in July was close to 8%, which is over double the national average.
The U.S. labor force declined by nearly 800,000 workers between April and July 2025.” Immigration policies may worsen labor shortages, increase expenses, and put contractors at significant financial risk,” the Bank of America research stated.
Real Estate News:
The cost of purchasing a home has gone up over the last many years. Since 2020, America’s housing market has grown 57%, reaching a record $55 trillion. In 2025, house prices are expected to rise by 3%. President Trump’s policies could have complex implications for the housing market, particularly on the issue of affordability.
According to the real estate company’s figures, the value of the US home market has increased by $20 trillion. The gains in the housing market in 2025, however, have not been distributed equally. More than any other state, New York added $216 billion in value in the past year. Illinois, Pennsylvania, and New Jersey were closely behind.
“Demand continues to outpace supply in the Northeast,” Orphe Divounguy, a senior economist, said. “When you look at housing inventory in New York, there are only half as many homes for sale as there were before the pandemic. So you have the value of the existing housing stock really rising a lot in that market.” In contrast, states that were once magnets for buyers like Florida, California, and Texas lost billions in their housing markets in 2025 as demand started to cool in these states due to elevated prices.
Housing market demand is seriously suppressed by mortgage rates and property taxes. Mortgage rates ease slightly to 6.7% by the end of the year 2025. Based on this, demand looks set to remain at exceptionally low levels. Florida, along with California and Texas, is particularly vulnerable to worsening natural disasters fueled by climate change, and the cost to insure a home has risen precipitously as a result.
Despite a decline in overall buyer demand, new house construction has supported Sun Belt housing market values. With the exception of Utah, Texas has the largest percentage of newly constructed homes contributing to the market’s value increases since 2020, more than one-fifth. Florida’s proportion of market gains from newly constructed homes placed it fourth out of all 50 states.
“Across the nation, new construction has produced affordable areas,” Divounguy stated. “Those are markets that generate opportunities for individuals seeking to enter the job market and climb the housing ladder.”
How could housing policy evolve during Trump’s second term?
Although specific housing policy recommendations from President Trump have not yet been revealed, a possible direction can be deduced. The past few years have seen a notable increase in home prices due in large part to a shortage of available dwellings. Trump has acknowledged that many Americans face a severe housing crisis, and he has put up two main options to remedy it:
- Construction delays could be shortened by expediting zoning approval procedures; however, this would require local attention, with the exception of federal territory.
- allowing new house construction projects on government territory.
It appears unlikely that other possible solutions, including building multifamily housing in areas designated for single-family houses, will be implemented under a Trump administration. In neighborhoods that are primarily single-family, Trump has typically opposed multifamily buildings. Preventing the development of low-income housing in suburban regions was another key campaign pledge.
In addition to housing, if some of Trump’s policies are carried out, inflation may increase, which would raise mortgage rates and further reduce demand for homes. It is anticipated that the privatization of government-sponsored enterprises (GSEs), such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), will be the main focus. This could increase mortgage-backed securities (MBS) spreads and result in even higher rates for borrowers if it is done hurriedly.
Stocks and Crypto:
US Stocks Shaken Up By Trump’s Tariffs:
Since Mr Trump’s victory, the stock market has shown extreme volatility and unprecedented losses. Investors were worried as the stock market fell sharply in the anticipation of major tariffs later dubbed as “Liberation Day” tariffs on April 2nd. The S&P 500 had already dropped 10.1% from its February highs. Businesses were worrying about costlier supply chains, while households feared higher consumer prices.
On liberation day, Trump announced 10% baseline tariffs on nearly all imports, and much higher tariff rates on key partners: China(54%), the EU(20%), Vietnam(46%), Japan(24%), Taiwan(32%), and Cambodia( 49%). But on the next day, ie, 3 and 4 April, share futures dropped immediately and panic turned into a full crash.
The Nasdaq lost 1,600 points (its worst since the COVID-19 crash), the S&P lost 6% in just one day, wiping out billions in value, and the Dow fell nearly 4,000 points in 2 days, losing $6.6 trillion in market value. VIX index, which measures volatility, “fear gauge” spiked to 45.31, the highest level in 5 years. By April 7, markets had endured the worst three-day drop, as 10% baseline tariffs came into effect on April 5.
Situations worsen when China retaliated with its own 34% tariffs on US imports, and stated that this wasn’t just an American policy choice—it was escalating into a full-blown trade war. This created panic in the business world and among investors as they will now face higher costs, weaker profits, and a global economic conflict.
On April 8-9, after Trump raised tariffs(11-50%) on 57 trade partners, but on the same day, due to pressure from Treasury and Commerce Secretaries, Trump reduced tariffs to 10% ( excluding China). The pause announcement led to a historic rally. The S&P 500 rose 9.52% for its biggest one-day gain since 2008. The Dow Jones rose 7.87%, for its biggest gain since March 2020, and the Nasdaq rose 12.16% for its largest one-day gain since January 2001 and its second-best day ever. Stock indexes recovered April crash losses by May 2.
On May 12, the US and China signed a deal by which the US will cut China’s tariffs to 30% and China will lower to 30% for 90 days. By June 27, SP surpassed its pre-crash peak and closed at 6173.07.
When Trump’s tariff shock hit, foreign investors and governments that hold about 33% of US Treasuries started losing confidence in U.S. assets. Investors instead moved money into gold, the Swiss Francs, and German government bonds, according to the New York Times.
Trump’s tariffs sparked national and international reactions. Business executives and Republicans called on the Trump administration many times to check on their tariff plans and also blamed him for the market crash. The Fed also resisted Trump’s pressure for rate cuts. Chancellor Scholz of Germany called tariffs “an attack on the trade order”. China’s officials called the policy “protectionist bullying”. This year so far has shown that trade protectionism came at the expense of market stability and investor confidence.
What’s Trump’s interest in crypto?
Cryptocurrencies, the only asset expected to outperform among all asset classes during Trump’s second administration. Trump, who was once a crypto sceptic, had pledged to make America “the Bitcoin superpower of the world and the crypto capital of the planet”. In March, the White House established a strategic bitcoin reserve. In April, Bitcoin prices also fell after Trump imposed liberation day tariffs, but after a trade truce with China on May 12th, Bitcoin went to a record high.
In March 2025, Trump signed an executive order to create a “Strategic Bitcoin Reserve” and a US “Digital Asset Stockpile.” This would include five cryptocurrencies (including Bitcoin). The legal and institutional framework for US crypto has been laid. But as of now, it’s largely preparatory. According to Chainalysis, as of May, the US government was estimated to hold about $20.9 billion ( $20.4 billion in Bitcoin) in crypto assets. No new bitcoin purchases have been confirmed.
In July, Trump Media & Technology Group submitted applications to the SEC to establish its own exchange-traded fund, known as the “Crypto Blue-Chip ETF,” which would hold Bitcoin and other virtual currencies.
How has the price of Bitcoin changed since Trump was elected again?
Bitcoin’s gross domestic product would place it in the top 10 if it were a nation, similar to nations like Canada ($2.14 trillion) and Brazil ($2.17 trillion). Bitcoin has risen 75 percent after Donald Trump was re-elected in November 2024, surpassing its previous high of $69,539 at the closing of the election day. The first time it rose past $100,000 was in December.
Following Trump’s announcement of new taxes on a number of nations and businesses globally, the cryptocurrency saw a temporary decline below $90,000 on February 25. However, it recovered after Trump’s proposal of a “crypto reserve.” The emergence of Bitcoin also coincides with a broader backdrop of economic instability, particularly the current wars in the Middle East and Ukraine, as well as the global unrest caused by Trump’s harsh and intermittently applied tariffs on major trading partners globally. Last week, Citibank analysts published a research paper stating that “Bitcoin has demonstrated resilience this year, rebounding in line with its macro exposures following tariff announcements.”
US Businesses:
US Businesses refers to companies and organizations based in the US, such as large corporations like Walmart, Amazon, and Microsoft, as well as millions of smaller businesses and startups across various sectors. The year 2025 is accompanied by dynamic policy changes, which lead to uncertainty, but business confidence is crucial for investment growth, which is weakening in the wake of shifting trade policies, rapid technological disruption, and cautious investor sentiment.
US businesses are independent in their decisions to expand capital plant, to lay off surplus workers, and to develop new products. So they enjoy greater flexibility than their counterparts in Western Europe and Japan. But US businesses face higher barriers to enter their rivals’ home markets than foreign firms face entering US markets.
Businesses are affected in different ways:
Supply Chain Strategies:
Businesses are diversifying themselves to reduce the risk of depending on one region. 46% of firms are entering new markets, while 42% are localizing supply chains to cut transport costs and improve oversight. Also, 22% are regionalizing, 20% reshoring. Many businesses, about 75% are expanding their supplier networks, although it adds complexity, but AI-driven contract and pricing tools help manage supplier networks efficiently.
Trade policy uncertainty:
Trade policy in 2025 is no longer based on long-term agreements and stable rules. Instead, trade rules are becoming more transactional with frequently changing tariffs and exemptions depending on political goals. As a result, firms delay investments or expansion plans due to the uncertainty of future costs. In response to trump measures, 40% of executives plan to increase U.S. sourcing to avoid tariffs on imports, which is still more expensive and reduces cost efficiency. On the other hand 33% are cutting costs —reducing operational spending, negotiating harder with suppliers, or postponing projects—to neutralize the extra burden.
Sustainability pressures:
In 2025, 62% of companies say sustainability is now a higher priority than a year ago. So they are putting more effort into reducing emissions, using cleaner energy, and making supply chains environmentally responsible. But Trump’s decision to withdraw from the Paris Agreement and the EU’s consideration of slowing down its Carbon Border Adjustment Mechanism (a rule that would tax carbon-heavy imports) will pose a risk to climate regulations, and companies may feel less pressure to stick with green initiatives, leading them to cut their sustainability investments. However, they are expecting progress in climate initiatives.
Balancing Efficiency and Agility:
Year 2025 is very challenging for businesses and investors as they face trade-offs between diversification vs. localization and flexibility vs. control (switch suppliers quickly or keep fewer suppliers). Companies must constantly recalibrate short-term (cost-cutting) and long-term (supply chain redesign) strategies as they can’t rely on fixed strategies due to a flexible trade and economic environment.
If businesses want to succeed in this dynamic environment, they have to manage costs creatively and adopt advanced technologies like AI and automation. These will help them reduce risks, handle supply chain complexity, and streamline operations.
The New Globalization:
US firms are not retreating but are adapting to a fragmented trade system with new strategies. Despite political pressure to bring production back to the US, companies are still committed to global reach. In order to win the competition, firms have to adapt quickly to new rules, manage complex global supply chains efficiently, and use technology to stay resilient and competitive in this changing landscape.
Business Impact:
Due to disrupted supply chains and trade barriers, some firms, such as toolmaker Stanley Black & Decker, on Wednesday, have already announced plans to raise prices in response to the measures. Many companies, including carmakers such as Stellantis and Mercedes, have said they cannot provide guidance about sales expectations for the months ahead. Economists have already warned that tariffs on imports will lead to higher prices.
Consumer sentiment has fallen sharply amid declines in equity markets and risk appetite. In addition, U.S. consumer inflation expectations have risen markedly since the start of the year. Treasury yields have increased, and corporate risk spreads have widened. Policy uncertainty has remained high, with many firms highlighting concerns about the impact of trade policy changes on prices (Federal Reserve Board 2025).
Investment spending is projected to be particularly hard-hit following the earlier frontloading of imported investment goods. Going forward, the supply of investment goods is anticipated to be disproportionately impacted by tariffs due to their high import content. At the same time as investment demand cools due to record-high uncertainty, the rise in financing costs, and reduced domestic and external demand.
In 2026, growth is anticipated to edge up to 1.6 percent as the economy adjusts to higher trade barriers and policy uncertainty gradually declines. Growth could prove to be stronger over the next few years if proposals to extend some expiring provisions of the Tax Cuts and Jobs Act and introduce other new fiscal measures clear the legislative process and are implemented. The resulting increase in the federal budget deficit would then be likely to broadly offset the budgetary impact of additional tariff-related revenues, with the latter estimated to reduce the primary deficit by $2.5 trillion over 10 years (CBO 2025).
Conclusion:
From my point of view, Trump’s decision to introduce tax cuts at the expense of trade is not a wise one because it is the globalization era, and one can’t boost its economy by restricting trade. The US can’t expect to practice free trade theory on others when it is imposing protectionist policies. So when the US imposed liberation day tariffs on its major trading partners, they retaliated, and US GDP fell in the first quarter of 2025. Even when he just shared his idea of imposing tariffs economy declined. Extending Trump’s provisions of Tax Cuts will cause revenue loss of $4.1 trillion when growth is also accounted for. Deficit will rise to $4-5 trillion even with some spending cuts.
In the short term, middle-income households benefit the most, particularly in 2026. Permanent expense and investment-related reductions have long-term benefits for higher earners and enterprises. Due to tighter tax credits (EITC, CTC, and healthcare subsidies), some low-income households actually lose benefits after the 2030s. Tariffs are expected to generate between $1.7 and 2.1 trillion in revenue between 2025 and 2034. Tariffs bring in money for the government but will lower long-term GDP by 0.8%. The drag might worsen if retaliation (from China, the EU, etc.) persists. Taxes and tariffs are a tug-of-war between two policies.
The US economy expanded an annualized 3.8% in Q2 2025, much higher than 3.3% in the second estimate, and marking the strongest performance since Q3 2023. This only became possible when the US eased foreign tariffs and signed a trade deal with China, and due to a rise in consumer spending. PCE rose 2.5%, while spending on goods remained robust (2.2% vs 2.4%).
Fixed investment was also revised higher (4.4% vs 3.3% in the second estimate), including equipment (8.5% vs 7.4%), intellectual property products (15% vs 12.8%) and structures (-7.5% vs -8.9%). Residential investment however, fell more (-5.1% vs -4.7%). Also, government consumption shrank slightly less (-0.1% vs -0.2%). On the other hand, the contribution from net trade was revised lower, as exports declined at a faster pace (-1.8% vs -1.3%) and imports fell 29.3% (vs -29.8%). In addition, the drag from private inventories worsened (-3.44 pp vs -3.29 pp). source: U.S. Bureau of Economic Analysis.
