The U.S. Economy Is Stumbling Badly

Everyone who has ever used a dating app knows the disappointment when an online picture doesn’t match reality. Sometimes, economic reports suffer from a similar gap. On Wednesday, the Bureau of Economic Analysis (BEA) reported that the country’s Gross Domestic Product (GDP) grew at a 3 percent annual rate in the second quarter. That sounds like good news, but the underlying data tell us that the U.S. economy is stumbling—and that’s before President Donald Trump doubled down last week on his destructive tariffs.

GDP captures everything the U.S. economy produces, whether it goes into consumption or savings and investment. The BEA data show that Americans’ private consumption grew in the second quarter at an anemic 1.4 percent rate—half the rate in 2024 and half the annual average since 1990. Business investment was also weak in the second quarter, increasing at a 1.9 percent rate, again barely half last year’s rate and one-third the average rate since 1990.

There’s more bad news from other economic fundamentals. Residential investments declined at a 4.6 percent annual rate, compared to 4.2 percent gains in 2024 and average annual gains of 2.5 percent since 1990. And government consumption and investment were nearly flat.

The latest jobs numbers from the Bureau of Labor Statistics also show a weak economy. So far this year, employment has increased an average of 85,000 jobs per month, falling to 32,000 jobs per month over the past three months, versus monthly increases averaging 216,000 jobs in 2023 and 168,000 jobs in 2024.

The official 3 percent growth report for the second quarter does not reflect the economy’s fundamentals. So, where did it come from?

I have an advantage here because I oversaw the BEA as Bill Clinton’s Under Secretary of Commerce and learned precisely how the Bureau builds the GDP measure. The answer is that the 3 percent growth number was an artifact of how it technically accounts for changes in imports, which fell dramatically in the second quarter.

Trump’s tariffs initially took effect on April 1, 2025, also the first day of the second quarter. Over the next three months, our imports fell at a virtually unheard-of 30.3 percent rate because markets worked as they were supposed to. As the tariffs began to raise import prices, as confirmed by the recent uptick in inflation, businesses and consumers pulled back sharply on those purchases—an important reason why overall consumption and investment weakened.

That’s what always happens when a country imposes high tariffs. Less well-known is that falling imports are counted as a positive for GDP growth under the BEA’s growth accounting. The approach here logically follows BEA’s larger framework for tracking GDP. Growth represents how much the value of domestic production—the DP in GDP—increases, whether it goes to private or public consumption or savings and investment. Imports present a special case because households, businesses, and the government use them without producing them. So, BEA subtracts imports from its measure of the value of output produced here, and when imports fall sharply, as they did in the second quarter, the decline is counted as a positive for growth. Similarly, when imports rise, the increase is counted as a negative for domestic production.

BEA’s treatment of exports follows the same logic. When we produce and export goods or services, they don’t appear as part of consumption or investment. Accordingly, when exports rise, the increase is seen as positive for growth; when they fall, the decrease is a negative for growth.

That’s how the dramatic decline in U.S. imports since Trump’s “Liberation Day” drove the 3 percent official growth rate for an economy that by every basic measure is weakening.

A simple comparison of past years and decades illustrates today’s economic weakness and how Trump’s tariffs have distorted our import and export flows. (I exclude the years of the financial crisis and pandemic here as Black Swan outliers.)

The weakness in the second quarter came after the economy’s substandard performance in the first quarter, when BEA found that GDP contracted at a 0.5 percent annual rate. Again, consumer spending was weak, and residential investment and government consumption and investment declined. Again, Trump’s tariff plans also played a role: U.S. businesses sharply increased their investments by stockpiling foreign-made equipment, technologies, and inputs before his tariffs raised prices. So, imports surged 38 percent in the first quarter, and under BEA’s accounting, that sharp increase turned sluggish growth into a technical quarterly contraction.

What happens next for Americans will depend on many unknowns, but the outlook seems bleak based on what we know today. Trump just announced higher tariffs on imports from 28 countries, including Canada, Brazil, Taiwan, India, and other important trading partners, and a new survey by the Federal Reserve Bank of Atlanta confirms that most businesses plan to respond to the tariffs by raising prices. So as they take hold, inflation will accelerate, further slowing or contracting consumption and investment. This nexus between tariffs and inflation is the main reason the Federal Reserve hasn’t cut interest rates as the economy has weakened.

As conditions deteriorate later this year, the Fed will cut interest rates at least modestly, but that won’t boost growth much. The Fed directly controls only very short-term rates, while markets determine longer-term rates. As I noted recently in these pages, the most likely direction for those longer-term rates for business loans, mortgages, and most Treasury securities is up, not down. Our coming budget deficits under Trump’s ill-considered tax program are so large as a share of the economy that attracting domestic and foreign capital to fund them—and new private lending financing them—will require higher rates, especially with inflation rising.

Reversing Trump’s tariff and tax program is the only reasonable way to restore healthy growth for the United States. Since that won’t happen, our most likely prospects for 2026 are stagflation or recession.