Much of the current commentary praises America’s remarkable economic resilience despite broad tariffs, erratic policies and even the current administration’s overt attacks on democratic institutions.
Yet on closer inspection, the awesomely positive narrative of a triumphant Trump era is based more on slogans than solid ground. Beneath the surface, seven cracks are waiting to appear.
No inflation – no problem (yet)
The muted price impact of tariffs – with the Consumer Price Index (CPI) rising to just 2.7% in July – reflects pre-tariff stockpiling and broader temporary price dynamics. The anticipation of tariffs drove a huge surge in goods imports (in March, around USD 347 billion, from an already high monthly average of about USD 270 billion in 2024) and left firms stocked up with large inventories. This reduced the need to purchase tariffed goods over recent months, dampening immediate price pressures.
Yet some underlying effects are visible. Detailed inflation data reveal that the rise in CPI was largely contained by a significant fall in the energy index, to -1.6% annually. This has offset the increase in core inflation (all items, minus energy and food, which are affected by tariffs) of 3.1%, above previous trends.
As inventories are depleted and the dollar continues to weaken, that’s when the real inflationary impact of tariffs will become clearer.
Markets are calm… until they aren’t
The market’s lack of reaction to current policy uncertainty and changes is rather striking – and the prevailing euphoria even more so. Market muteness seems to be driven by a combination of fear of political backlash and a short-term mindset. Investors seem more eager to exploit near-term gains than to worry about longer-term risks.
At the same time, the euphoria in the tech sector recalls earlier episodes of irrational exuberance, such as during the early 2000s dot-com bubble. This time, AI is the trigger. The hype around it is so large that it appears to be propping up the entire US economy, with optimism hinging largely on the soaring valuations of a few large tech firms. Even some in the AI community warn of overinvestment but the hype machine rolls on. History suggests this cannot last forever.
Consumers are still spending – but only at the top
While US consumer sentiment continues to swing, there’s no doubt that strong consumption is only driven by wealthier households, with high purchasing power, fuelled by asset gains in real estate and the stock market, rather than broad-based income growth. The top 10% is now responsible for nearly half of all spending, a record high.
Meanwhile, the purchasing power of middle and lower-income households is being eroded. Such an imbalance makes the US economy unusually dependent on affluent consumers and vulnerable to downturns in asset markets, which raises concerns about its long-term stability.
Tariff revenues won’t fix public debt
Between April and June 2025, US tariffs generated roughly USD 65 billion, and the Urban-Brookings Tax Policy Center estimates a total of USD189 billion in 2025 and nearly USD 360 billion in 2026. Yet according to Congressional Budget Office estimates, the One Big Beautiful Bill Act will add around USD 590 billion per year of tax cuts and spending increases. So next year, tariff receipts – borne largely by US consumers and small businesses – would barely offset revenue lost from tax cuts that disproportionately benefit large corporations and high earners.
Rather than closing the fiscal gap, this policy mix is likely to deepen the federal deficit and accelerate debt accumulation. US federal debt now stands at 123% of GDP, higher than France’s 113%, a level the markets already find troubling. Yields on 10-year US Treasuries are at 4.2%, higher than in any euro area country. This year, federal interest payments are expected to reach USD 1.2 trillion (even surpassing the US’ vast military expenditure).
In short, the idea that tariffs shift the US tax burden onto foreign taxpayers, allowing domestic taxes to be cut while restoring fiscal stability, is a myth, as is the idea that tariffs can finance a modern state.
Forced Fed rate cuts to reduce borrowing costs will backfire
Political pressure on the Federal Reserve to slash interest rates has reached the point of attempting to fire Fed board members. Yet cutting policy rates is unlikely to reduce long-term Treasury yields because the problem is debt, not monetary policy.
Markets appear complacent, cheered by the prospect of lower short-term rates, but such interference will undermine long-term confidence in the Fed’s independence and in the dollar itself – both pillars of global financial stability. Investors would demand a higher risk premium to hold US debt, which would push long-term rates even higher, an effect that a weak dollar would only magnify.
Is the labour market strong or weak? We don’t know anymore
July payroll data showed modest growth (73,000), pointing to a stable labour market. However, job data have become far less reliable. In August, the number of jobs added in May and June was revised sharply down (by about a quarter of a million), showing a much weaker labour market than expected.
While this isn’t unprecedented and the reasons were statistical (mostly accounting for new data and seasonal effects), the head of the Bureau of Labor Statistics was immediately dismissed for ‘rigging’ the data to make the administration ‘look bad’. This has eroded the credibility of a traditionally independent source of key information. Trusted data is a vital economic asset; undermining it is lethal. But once again, the markets just shrugged it off.
Free markets no more
Recent US policies – spanning from tariffs, price floors, export taxes and selective (de)regulation – are increasingly encouraging politicised investment decisions. These measures, often driven by short-term gains or arbitrary priorities, have favoured sectors with strong political connections. The crypto industry, for example, has emerged as a major beneficiary of the GENIUS Act. In manufacturing, the most striking case is the partial nationalisation of Intel, where unpaid grants from the 2023 CHIPS Act were converted into equity worth USD 9 billion. This is likely to be the first of many.
Whether such steps would genuinely enhance national security remains unclear but they’re hardly a textbook case of free-market capitalism. This growing departure from predictable, market-driven policy, combined with an increasingly assertive and interventionist administration, leaves companies wondering how far Washington intends to push this shift.
Overall, it’s clear that the US economy isn’t defying gravity – rather it’s riding a mix of temporary cushions, policy distortions and market euphoria. Beneath the headline resilience lies an over-reliance on asset-driven consumption, politicised investment and rising fiscal risks.
Gravity is unlikely to have been tamed; it may just be waiting in the wings for the right moment to reassert itself.
