Why the US Economy is Suddenly Looking a Bit Shaky

For most of the past few years, America's economy has been the envy of the developed world. The US has enjoyed better GDP, productivity and wage growth than basically every peer economy, and last year inflation came down from its lofty highs, falling to a low of 2.4% year-on-year in September. However, all of a sudden the American economy has started to look a bit shaky. Consumer confidence has apparently plummeted, the trade deficit is widening and inflation is looking dangerously sticky. While we won't get the official data for a couple of weeks, the latest GDP Now forecast, a real-time estimate of GDP maintained by the Federal Reserve Bank of Atlanta, suggests that year-on-year US GDP is on track to shrink by an astonishing 2.8% in the first quarter. So in this video we're going to explain how and why the US economy has started to look a bit shaky, and how much of it has to do with Trump. Do you have questions about TLDR's bias? Watch us respond to your criticisms in a dedicated criticism response video, it's linked in the description. So let's just get straight into it and explain why the Atlanta Fed thinks that the US is on the brink of a recession, if not in one already. In short, GDP is usually defined as the sum of four components, consumer spending, private sector investment, government spending and net exports. And most of these have declined recently. The biggest drop has apparently been in net exports, which is defined as exports minus imports. This is largely because the US has seen a steep increase in imports, presumably as a consequence of what's known as frontloading. Essentially, businesses are anticipating more tariffs in the future, so they're importing all the stuff that they need now, i.e. frontloading, before the tariffs kick in. This means more imports without a corresponding increase in exports, which mathematically implies a lower value for net exports. This has all been exacerbated by the strength of the dollar at the moment, which has risen as investors expect tariffs to both invite further interest rate hikes and cripple other currencies, which has allowed the US to import more stuff. Now, to be fair, this is sort of what you'd expect before tariffs come into place. So it's not necessarily something that the current administration should really worry about. However, this isn't the only thing bringing the Atlanta Fed's GDP figures down. The other big thing in their data is the collapse of consumer spending, which was previously really quite strong in the US, and had probably been the main reason that the US outperformed other developed economies over the past few years. According to Atlanta Fed's latest estimate, year-on-year consumer spending growth is basically zero, down from about 2% last year. This is consistent with other data we've seen from the University of Michigan and the Conference Board, who run the two most popular surveys of consumer sentiment in the US. The University of Michigan's monthly survey, for instance, found that consumer sentiment dropped steeply in February, largely because consumers' inflation expectations, i.e. how much they expect prices to rise over the next five years, are currently the highest they've been since 1995. The Conference Board survey found a similarly steep decline in consumer confidence in February, in large thanks to a steep decline in their so-called Expectations Index, which is based on consumers' short-term outlook for income, business, and labour market conditions. Somewhat ominously, the Conference Board survey notes that for the first time since June 2024, the Expectations Index was below the threshold of 80, that usually signals a recession ahead. Surveys of business confidence aren't much better either. The ISM Manufacturing Index, for instance, which basically measures how well American manufacturing companies are doing, found that US manufacturing stagnated in February, and was only kept afloat by the front-loading of imports we mentioned earlier. What makes all of this even more precarious is that an ever-increasing fraction of consumer spending is being driven by the richest Americans. According to analysis by Moody's, the top 10% of earners now account for an unprecedented 50% of consumer spending. Given that overall consumer spending is stagnant, and the bottom 90% are accounting for an even smaller fraction of it, this implies that 90% of Americans are already basically in a recession. One of the other consequences of this is that it means that the stock market actually really matters. Usually when people say that the stock market isn't the real economy, they're right. But when the richest Americans are keeping the American economy afloat, the stock market does sort of become the economy, because rich Americans hold a lot more money in stocks, which means that stock market declines, like the ones we've seen recently, are more likely to discourage them from spending, potentially pushing the US into a recession. Now, not all of this is down to Trump. At least some of the consumer spending that we saw over 2022 and 2023 was driven by savings accumulated during the pandemic, which have now run out. But all of the surveys we just mentioned cite tariffs, or at least the threat of tariffs, as a big reason for waning confidence. And they're definitely the main reason that consumers and businesses are anticipating higher inflation. This has also shown up in polling, because while Trump's net approval numbers aren't appalling, his economic numbers, which used to be a strong point for him, are actually pretty terrible. Gallup just registered Trump's worst ever net approval rating for his handling of the economy at negative 12, while Ipsos found that it had fallen from positive 4 in January to negative 8 in February. And this brings us nicely to another major issue, inflation, which is proving frustratingly sticky. Year-on-year inflation has actually risen quite steadily from its September low of 2.4% to 3% in January, and Trump's tariffs will probably make things even worse by making imports more expensive. This will probably require further interest rate hikes from the Federal Reserve, or at least fewer cuts, which might explain why Trump's team, including Elon Musk, have started taking shots at the Fed. The final thing we want to mention is the national debt, and this was always a risk with Trump. After all, during the campaign, he said that he wanted tax cuts without committing to any significant spending reductions to match them. There was some hope that maybe Doge would be able to find sufficient savings to keep things balanced, but this really no longer looks plausible. Doge's own figures admit that they've only saved a few billion dollars, which is negligible in the context of a $7 trillion budget, and especially when the most recent Republican budget proposal, which Trump endorsed, looks to add at least another $2 trillion to the deficit over the next 10 years. While US borrowing costs have actually stayed pretty low recently, this is mainly because investors are anticipating economic turmoil and buying up treasuries as a safe asset, and assuming that the US can't borrow infinite amounts of money, this is ultimately unsustainable. All in all, while it's probably too early to say anything definitive, the American economy is looking the shakiest it has for some time now. 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