Four reasons Trump’s economic agenda hasn’t tanked the economy

Economic predictions that President Trump’s tariffs and other policies would tank the economy turned out to be wrong. The past year has seen sweeping, unprecedented policy shocks that many experts would have expected to slow the economy, if not crash it. And yet, the unemployment rate is below 5%, GDP is expanding at a moderate pace, the stock market continues to rise, and inflation—while above the Fed’s 2% target—is far from the generational highs we saw in the wake of the pandemic.

First, the shocks.

1. The US has seen a sharp escalation in the level of tariffs, alongside a dramatic expansion in their scope and unpredictability.

Trump’s second term has looked nothing like the first, as the average tariff rate jumped from 2.4% on inauguration day to a high of 28.0% in April.

2. Net immigration was curtailed more sharply than anytime since the 1920s.

In the decades prior to the second Trump administration, net immigration typically totaled between 500,000 and 1.5 million. In 2025, however, net immigration fell off a cliff. New Brookings research estimates that net immigration last year amounted to between -10,000 and -295,000 people—far below the 25-year median of 1.2 million.

3. The US is taking on more debt than any time outside of a recession or war.

The One Big Beautiful Bill Act (OBBBA) will raise the public debt by $4.2 trillion, or 9% of GDP, over the next decade.

4. The independence of the Federal Reserve is under attack.

This aggression includes continued pressure from the White House to lower interest rates; the attempted firing of Governor Lisa Cook under dubious pretenses; the appointment of a Fed governor who remains the sitting chair of the Council of Economic Advisers; and perhaps most egregious, the criminal inquiry of Fed Chair Jay Powell.

Any one of these shocks is significant, and collectively they are extraordinary. If you locked 100 economists in a room one year ago and informed them of these developments today, I suspect virtually all would project the U.S. economy would be stagnant at best and cratering at worst. What explains this conundrum?

There are four possible explanations.

1. The shocks to the system have been overestimated

Perhaps these shocks are not as large as many initially thought. On trade, a combination of evasion, transshipments, and delayed implementation could mean that the sharp rise in the average trade-weighted tariff is overstated. Similarly, net immigration may be closer to zero than negative 300,000, with a muted impact as the labor market continues to soften. On Fed independence, perhaps markets see the attacks on Powell and Cook as constrained by the composition of the Federal Open Market Committee (FOMC)—which requires a simple majority to change rates.

Tariff revenues have increased by less than $200 billion on the year—painful for U.S. consumers and businesses—but insufficient to upset a $30 trillion economy. To date, our trading partners have barely retaliated against our tariffs, which dampens their expected impact. And attacks on Fed independence have not yet translated into a monetary policy stance that markedly deviates from traditional frameworks.

2. New economic stimuli are offsetting the negative shocks

Perhaps there are offsetting stimuli that counteract these negative shocks. The flipside to the $4 trillion in new debt owing to OBBBA is a meaningful rise in disposable income, with Goldman Sachs estimating a 0.4 percentage point bump in disposable income over the first half of 2026. Looser capital restrictions are likely be driving investment to a certain extent, and the AI boom comprised about 40% of GDP growth for 2025 through August according to the St. Louis Fed. At the same time, the president’s trade frameworks have embedded large investment promises coupled with commitments to purchase more American products.

The AI investment boom is real and has helped sustain growth. But, on the flipside, the tax refunds will benefit U.S. households in 2026 and probably do less to explain 2025 growth. The same is true for expanded access to capital.

3. Economists got it wrong

Perhaps mainstream economic models are simply wrong. Is it possible the economics profession overstated the value of immigration, free trade, Fed independence, and a sustainable fiscal outlook?

It’s entirely possible that this volatile episode in American policymaking will lead to a greater understanding of the U.S. economy. There could be one enduring lesson—learned both over the course of 2025 as well as during the pandemic—that the size and diversity of the U.S. economy usually protects it from sharp downturns.

This episode could reinforce that these policy decisions are not necessarily “good” or “bad” in absolute terms but rather a series of tradeoffs to be precisely measured and identified. For example, the mainstream consensus on trade liberalization over the last several decades has been that it grants millions of American households access to cheap goods, opens up massive new markets for U.S. investment and exports, provides access to cheap capital for U.S. debt and entrepreneurs, and strengthens geopolitical alliances. But these benefits came at a cost, namely sacrificing economic autonomy, hurting select industries and communities through sharply increased competition, and foregoing an imperfect—but still significant—source of revenue in the form of tariff collections.

On the narrower question of whether economists were wrong about the near-term impacts of various shocks, it is simply too early to tell. After all, it has been just a few weeks since the Department of Justice announced its investigation of Chair Powell. It’s also important to note we have indeed seen a deterioration in the near-term economy. Since inauguration day, the headline unemployment rate has risen by 40 basis points, while a broader measure of labor demand known as the U-6 has jumped by 90 bps. Non-shelter inflation has risen by 20 basis points. Risk premia on Treasuries have risen by 30 basis points. By many metrics, we are a bit worse off now than we were a year ago.

4. The shocks are still too fresh—time will tell

And, finally, it simply takes for shocks to move through the system.

This explanation is consistent with economic theory and evidence. The economic impact of curtailed immigration and mass deportations can take years to materialize. The Congressional Budget Office has established a causal link between government debt and crowd out of private capital, but it also found that this relationship often plays out over the long run. And Fed independence is not a goal for its own sake but rather an important factor in monetary policy decisions. The complexity of the FOMC’s composition means that it may take years until we see the full impact of political influence. And on tariffs, as we have heard from our western trading partners recently in Davos, only now have they begun to explore alternatives to the U.S. in terms of trade and investment decisions.

Can the U.S. economy remain resilient?

Without a doubt, 2025 was a year like no other. One measure of policy uncertainty—the St. Louis Fed’s Economic Policy Uncertainty Index—peaked at a reading of 460 after having never surpassed 250 outside of COVID. If nothing else, this past year has tested the limits of our understanding of the potential impacts of policymaking on the economy.

If these shocks persist, their impact will likely be more damaging than what we observed in 2025. The U.S. economy has proven resilient thus far—only time will tell if it can continue to absorb these shocks and persist on its path of slow, but sustained expansion.