The Current US Economy: Welcome to the Tragic Kingdom
Are tariff refunds coming?
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This newsletter is a long read on a range of US economic factors that may impact your 2026 strategic planning. TL;DR It’s not a recession yet, but growth has slowed and more short- and long-term economic indicators have turned negative. And it’s never good when the majority of US households are nervous about spending money.
Is it a recession?
Recession vs slowdown 2025
A year ago, I was buying a house. Inflation was stepping down steadily toward 2%, unemployment was low, and (minus some specific industries) the business environment looked pretty stable.
A year later, welp…it’s not that. American voters chose the chaos scenario, and it’s a doozy. From April, economic data largely corresponds to the negative impacts expected from tariffs, declining immigration, higher deficit spending, and generally poor management of a previously predictable and balanced major economy.
Yet, the stock market continues to reach new highs. So what the heck is going on?
First, let’s talk about the R word. A recession means negative GDP growth for two consecutive quarters. While the economy had negative growth in Q1, the rush to onshore goods in Q2 before tariffs took effect moved GDP back to positive. While consensus forecasts show annual GDP growth for the US economy, growth has certainly slowed and will be below 2%. By contrast, global growth is forecast at 3% in 2025 and 3.1% in 2026. Individual results may vary.
Whether it’s a slowdown or a recession, the chaos is real. We continue to experience unexpected policy decisions and shock events. The top sources of chaos impacting the economy:
- Uncertainty. I wrote about this last November and again in February. Uncertainty is an economic killer. The incoherent, day-to-day policies of the current administration have frozen people in place. Congress can’t establish a working budget. It’s hard to focus on the future when every day is a tornado of conflicting news. When you don’t know what to do and can’t make a reliable bet on the future, you do nothing. You wait.
- Negative immigration. 1.5 million people have voluntarily left the country since March, impacting industries from hospitality to healthcare to agriculture. New visas aren’t being processed. ICE activity is projected to have a -$275 million impact on California’s economy. And how about the own goal of potentially losing 14,000 high-paying manufacturing jobs by arresting 300 authorized foreign workers?
- Increasing US isolation and less access to foreign markets. We’re not playing well with others, and the economic impact could be as much as a 3% reduction in GDP growth this year. We’ve become accustomed to being the desirable market that can work with almost anyone, anywhere. That’s changing. Boycotts of the US, whether for travel or goods, are having a real impact. The world’s largest economies are making new partnerships that exclude the US.
Economic considerations
Consumer Confidence & Spending Cuts
As you face the next 18 months, consider the specific economic factors below in your planning. There are always opportunities, but they may require a pivot, restructuring, or use of debt. For many of you, the next 18 months may be more about navigating headwinds and staying in business.
Tariffs and de minimus exemptions. Among the “hold my beer” competition of dumb economic moves, the rollout of tariffs, followed by months of exceptions, revisions, and snap levies is the biggest creator of uncertainty. Last week, an appeals court ruled the use of emergency basis was unlawful but could continue. (The stated national emergency is fentanyl trafficking.) We’re now waiting for the Supreme Court to make an expedited ruling in November. If the emergency basis is found illegal, the Treasury could be ordered to pay back the collected duties.
The other whipsaw has been the end of international drop shipping. The end of the $800 de minimus exemption for direct-to-consumer packages on August 29 has frozen global postal and package carriers and hit consumers with surprise charges for orders they placed weeks or months ago. After record June and July import rates to get Christmas products on-shore, import activity has again slowed. Warehouses are full and wholesalers are sticking with their prices because it’s hard to change them. Wake me up when November comes.
Employment. While the unemployment rate is still within the Fed’s target, rates in general and across demographic categories have risen. And unemployment rates don’t capture the 6.4 million Americans that would like to have jobs but have given up looking. If you lose your job, it’s hard to find a comparable replacement. Job growth in the past year has been revised downward by 911,000 jobs. On the upside, many small business owners are having an easier time finding qualified workers than one year ago and are feeling less pessimistic.
If you are hiring now, friend of the newsletter Nancy Harris and Ify Walker of Offor are hosting a virtual event later today on how to hire successfully in the era of the AI slop pile.
Consumer confidence. How you feelin’? Consumer spending makes up almost 70% of US GDP. McKinsey reports that 60% of US consumers have cut back on spending and are concerned about the rising cost of basic needs. Consumer sentiment has fallen over the last two months. And consumer debt delinquencies for credit cards and car loans have ticked up, with credit card delinquency at double the rate it was at the peak of the pandemic. Currently, we have a “K-shaped economy.” The top 20% of households are doing well and spending, in part due to the run-up in stocks and property values, which is masking the overall economic pain felt by the other 80%. If your customer lives in a household making less than $150,000 per year and your product is a discretionary purchase, expect things to get more difficult.
Inflation. We have two main measures of inflation — the Producer Price Index (PPI) and the Consumer Price Index (CPI). The PPI reflects wholesale prices, which are up 2.8% in the past year. You’re feeling this in your business — paying more for the same thing — but with tariff uncertainty and a softening market, you may not be fully passing those cost increases to your customers. The CPI is showing that inflation has ticked up again, reaching almost 3% over the past 12 months, with meat and dairy up 5.6%. (The Fed’s target is 2%.) Many companies are cost-sharing higher wholesale prices, which is holding back the CPI from reflecting the full inflationary impact of tariffs. The Supreme Court’s ruling could determine whether we experience the full inflationary shock to prices in 2026.
Government deficit and bond auctions. The US government is racking up debt at a record pace, already comparable to peak pandemic bailout spending. Deficits are funded by selling Treasury bonds and bills at periodic auctions. With US leadership behaving less predictably, those buying the debt want more reward, in the form of much higher interest rates. If buyers don’t get the rates they want, the bonds aren’t sold. When that happens, the Treasury buys its own debt ($10 billion last month). While federal debt and deficit aren’t right-now problems, US mortgage lending rates are tied to the 10-year Treasury bond rate. A bad market for bonds means higher mortgage rates.
Interest rates. Today, The Fed is expected to announce a 25 basis point rate cut, or .25%. That change will immediately make non-mortgage borrowing cheaper. It will also reduce the interest you earn on a high-yield savings account. The market expectation is that lending rates will fall further in December. That might make it a little easier to borrow if you have an opportunity or need to cover a short-term deficit.
