HOW LONG CAN THE U.S. ECONOMY DEFY EXPECTATIONS? / THE FINANCIAL TIMES

How long can the US economy defy expectations?

Despite the tariff shock, inflation is modest, stocks are up, and unemployment is low. Some experts insist it is too soon to tell

Myles McCormick and Claire Jones in Washington

© FT montage/Getty Images

When Donald Trump took office six months ago, economic forecasters held their breath.

The president had promised a radical political and economic agenda for his second term: a broad crackdown on migration that threatened labour supply, a dramatic downsizing of the federal government, and a new tariff regime with negative implications for growth and inflation.

But even as the US president has ripped up the policy rule book in the first half of this year, the world’s biggest economy has proved to be surprisingly resilient.

In the White House, Trump has done what he promised and more. 

He has deported thousands of migrants, gutted federal government contracts and shocked markets with the announcement of unexpectedly hefty tariffs on America’s trading partners. 

Further, he has attempted to browbeat the US Federal Reserve into lowering interest rates.

Yet — for now at least — the economic data has shown little evidence of fallout, with official statistics repeatedly beating economists’ expectations.

“The Fake News and the so-called ‘Experts’ were wrong again,” Trump wrote on his Truth Social platform this month. 

“Tariffs are making our Country ‘BOOM’.”

The economy might not be booming to the extent the president claims, but nor has it begun to crater as many experts feared in the wake of the tariff regime unveiled on April 2, or “liberation day”.

Despite a small uptick, inflation has remained modest, the labour market has proved robust, Wall Street profits remain healthy and stocks have rebounded after a dip.

While the economy did contract in the three months to April, the first quarterly decline in three years, markets remained unperturbed as investors interpreted the 0.5 per cent GDP slide as a scramble to import goods ahead of the introduction of tariffs rather than a symptom of underlying weakness.

GDP growth is forecast to jump to 2.4 per cent in Q2 figures due out next week, according to the Atlanta Federal Reserve’s GDPNow projection.

“I would say there’s not a big reason to worry in a broad sense,” says Thomas Simons, chief US economist at investment bank Jefferies, of the overall state of the economy, noting that gloomy consumer sentiment has in many cases become detached from economic reality.

“If you look at history for what causes recessions, it’s really financial shocks, contraction of money supply, big shifts in fiscal tightening and that sort of thing — and we’re not there.”

Despite fears that US consumers would ultimately bear the burden of tariffs by paying more for goods, so far the price impact has been limited © Levine-Roberts/Sipa USA/Reuters

Andrew Hollenhorst, chief economist at Citi, adds: “This is an economy that for multiple years has been more resilient than forecasters had expected.”

But others warn that while the fallout may not have materialised as quickly as anticipated, it still threatens to show up in the months ahead. 

“I would say it’s early days,” says Maurice Obstfeld at the Peterson Institute for International Economics, a Washington think-tank. 

“The economy clearly seems to be weathering some hits but I think that the surface resilience could be a little bit deceptive.”

The market’s nonplussed response to the president’s radical policy agenda has prompted jubilation in the administration, with officials seeing it as evidence that predictions of economic backlash were overstated.

“You’ve not really seen any appreciable effect at all in terms of US consumers and business paying more,” says Joe Lavorgna, counsellor to the Treasury secretary. 

“I think if it does happen, it’s going to be marginal from where we are.” 

Chief among the policies predicted to undermine the US economy is Trump’s use of sweeping tariffs to reshape America’s trading relationships with nations across the world. 

The president’s threats to slap huge levies on countries that failed to reach a deal with the US and his repeated oscillation over tariff levels have caused widespread confusion and concerns that US consumers would ultimately bear the burden by paying more for goods. 

But for now, the price impact has been limited. 

Inflation has remained in check, with CPI climbing to an annualised 2.7 per cent in June as the impact of tariffs began to seep in. 

The index has remained below 3 per cent since January, a far cry from the more than 9 per cent peak reached in 2022 in the wake of the Covid pandemic, and close to the Fed’s 2 per cent target.

US consumer sentiment ticked upwards in July to its highest level in five months, according to the University of Michigan’s Surveys of Consumers, while inflation expectations fell.

The labour market has also remained solid, despite fears that uncertainty could cause employers to hit the brakes on hiring. 

Almost 800,000 jobs were added in the first six months of the year, beating expectations for four months on the trot. 

Unemployment has hovered around 4.1 per cent, a level generally considered full employment by the Fed.

Even the corporate world has beaten expectations, with the vast majority of big companies reporting stronger-than-anticipated earnings for the second quarter. 

Of the 34 per cent of S&P 500 companies that had reported as of Friday morning, 80 per cent came in ahead of consensus, according to FactSet. 

The president has seized on the figures as he looks to pressure the Fed to bring down interest rates to “unleash” growth and curb US debt payments. 

On Thursday he took the unusual step of visiting the central bank — the first time a president has done so since George W Bush almost two decades ago — in his latest attempt to strong-arm chair Jay Powell into slashing borrowing costs.

Donald Trump, centre, inspects renovation work at the Federal Reserve building with Jay Powell, right, on Thursday. The president has been pressuring the Fed chair to cut interest rates. US Senator Tim Scott is also pictured, left © Andrew Caballero-Reynolds/AFP/Getty Images

But the picture of what Trump’s tariffs will do to inflation is unlikely to be complete enough for Federal Reserve officials to consider cutting rates, as the Federal Open Market Committee meets on Wednesday to decide the next move for US borrowing costs.

Most on the committee have welcomed recent inflation data as a pleasant surprise, but want more time to see whether strong tariff-related price pressures will emerge before backing their first cut this year. 

While the bulk of the committee is unlikely to consent to lowering rates until at least their mid-September vote, “they’ll probably get two dissents,” says Vincent Reinhart, a former Fed official who is now chief economist at BNY Investments.

Two Trump-appointed governors — Christopher Waller, a contender to succeed Jay Powell as chair, and Michelle Bowman — have signalled that they have seen enough to think that the US economy can weather the impact of the president’s tariff policies on prices. 

“[They] are saying tariffs will be a one-off price shock,” adds Reinhart.

The unexpectedly positive economic performance has prompted calls from some quarters for a rethink of how analysts assess the state of the economy.

“The major takeaway from the last few months is that economists all need to have a lot more humility about how well they understand the way various policy changes are likely to affect the economy,” says Oren Cass, founder of rightwing think-tank American Compass and an FT contributing editor. 

“Most of the economic models that folks are relying on are built on a set of assumptions that free markets are always optimal,” he says. 

“Therefore, by design, anything you do that would interfere with that freedom will cause the model to say that things are going to be worse.” 

Trump and his officials have been more scathing. 

“The economics profession has missed a lot, there’s way too much groupthink. 

And there’s way too much focus on the demand side of the economy,” says Lavorgna.

“Maybe there is inflation that is still coming. 

But economists have got five months in a row wrong, so why am I going to trust them?” 

The administration has insisted that foreign exporters will shoulder the costs of the tariffs as the price of doing business in the US, rather than passing them on to US consumers. 

“The reality is with the Trump tariffs, much or all of the tariff impact is shifted to the producers in countries which are desperate to sell to us so they bear the burden,” Peter Navarro, the chief architect of Trump’s trade wars, said in a CBS interview this month. 

Yet recent data shows some warning lights on the economic dashboard. 

The rosy picture of the labour market may be a facade, with much of June’s healthy headline growth figure due to a spike in state government employment, while private sector hiring cooled.

Meanwhile, June’s inflation figures suggested for the first time that tariffs were beginning to bite, with the price of goods associated with imports — including household appliances and furnishings, clothing and electronics — all creeping higher. 

The housing market has slumped, weighed down by high prices and mortgage rates, with existing-home sales dropping to a nine-month low in June.

The impact of some policies is yet to be fully felt. 

The effects of the president’s deportation drive — which is likely to affect employment — and the gutting of government contracts are expected to trickle through to the wider economy later in the year.

And while many companies have held off raising prices while they assess the longevity of the tariffs, once policy becomes settled as trade deals are struck, warn experts, businesses will be quick to pass on additional costs.

That is why many economic forecasts remain materially unchanged, despite the criticism. 

Goldman Sachs has incrementally ratcheted down its forecast for 2025 GDP growth, lowering its outlook from 2.4 per cent at the beginning of the year to 1.1 per cent in late July.

“I think the economy, on the surface, is holding its own, but it has vulnerabilities and tensions that are lurking below the surface,” says Obstfeld of the Peterson Institute. 

“And that may become more serious in the quarters ahead.”