Economic shock in the USA in 2025: Will Trump's tariffs trigger a historic wave of bankruptcies?

Solar collapse and retail apocalypse: These industries are collapsing under the burden of tariffs

The year 2025 was supposed to mark a new era of industrial growth in the United States. The Trump administration took office promising to bring back millions of jobs and revitalize domestic production through protectionist measures and aggressive tariffs. However, just a few months after implementing this "America First" strategy, economic data paints a diametrically opposed picture: instead of a golden age for manufacturing, the US is experiencing a wave of bankruptcies whose scale bears disturbing similarities to the 2008 financial crisis.

This analysis paints a picture of an economy teetering under the weight of politically induced cost increases. With over 700 corporate insolvencies projected by November 2025 – the highest level in 15 years – it is clear that tariffs are acting not as a shield, but as an accelerant. The irony of the sectoral distribution is particularly bitter: the manufacturing industry, the very sector the government declared its target, tops the insolvency statistics. Exploding costs for imported intermediate goods have undermined the competitiveness of precisely those companies that were supposed to be strengthened.

From the collapse of the once-celebrated solar industry and a renewed "retail apocalypse" to the massive burden placed on households, which now face an average of $1,200 in additional costs, the consequences of erratic tariff policies—with rates fluctuating between 34 and 125 percent within days—are ubiquitous. As the Federal Reserve is caught in a dilemma between combating inflation and providing necessary growth stimulus, the discrepancy between protectionist rhetoric and harsh economic reality threatens to leave long-term structural damage on the American economy. This article examines the mechanisms that led to this development and analyzes the profound consequences for businesses, consumers, and the global trading order.

Tariffs: An “accelerant”? Is Washington's policy driving the US economy into recession?

The American economy is experiencing a historic turning point. While President Trump promised an unprecedented economic boom through protectionist trade policies during his 2024 election campaign, conjuring up the vision of millions of new jobs, the actual developments of 2025 paint a fundamentally different picture. Corporate bankruptcies have reached a level not seen since the Great Recession, revealing fundamental contradictions between political promise and economic reality. The Trump administration's tariff policies, touted as a cure for structural deficiencies in American industry, are increasingly proving to be an accelerant for companies already suffering from the effects of persistent inflation and restrictive monetary policy.

Developments so far in 2025 reveal a disturbing discrepancy between political promises and economic reality. During his campaign appearances, Trump promised a rapid economic recovery and proclaimed that his trade policies would bring thousands of factories back to the US. However, reality shows a diametrically opposed trend: Since April 2025, when the sweeping tariffs were imposed, the manufacturing sector has continuously lost jobs, while at the same time, bankruptcies have risen to levels comparable only to the financial crisis of 2008/2009.

The dimensions of the wave of bankruptcies

The numbers speak for themselves. By November 2025, at least 717 companies in the United States had filed for bankruptcy, representing an increase of approximately 14 percent compared to the entire year of 2024 and marking the highest level since 2010. This trend is all the more remarkable given that it represents a continuous increase since 2022. In 2022, the US recorded just 372 corporate bankruptcies—the lowest figure in decades. Since then, the number has nearly doubled, reaching 635 in 2023 and 694 in 2024.

The dynamics of 2025 are particularly alarming. In the first half of the year alone, 371 bankruptcy filings were registered, the highest number for this period since 2010. The increase in so-called mega-bankruptcies—that is, the insolvency of companies with assets exceeding one billion dollars—is especially striking. In the first half of 2025, there were 17 such cases, the highest number since the outbreak of the COVID-19 pandemic. This development underscores that the crisis is not only affecting smaller companies but has also impacted established corporations with significant market presence.

A historical comparison clearly illustrates the severity of the current situation. During the Great Recession in 2009, corporate insolvencies peaked at 60,837 cases. In 2010, there were 828 insolvencies of large companies. The current figures are approaching these crisis levels alarmingly, and this is happening during a period that is not officially classified as a recession. The unique aspect of the current development is that it was not primarily triggered by a systemic shock such as the financial crisis or a pandemic, but rather by a deliberate trade policy decision by the government, which is having unexpected and counterproductive consequences.

Sectoral disruptions and structural shifts

The sectoral distribution of bankruptcies reveals fundamental shifts in the American economic structure. Contrary to historical patterns, where retail typically dominated bankruptcy statistics, the industrial sector leads the way in 2025. As of November, 110 companies in the manufacturing, construction, and transportation sectors had filed for bankruptcy, making this category the hardest-hit sector. An additional 98 companies in this sector were recorded separately, underscoring the severity of the situation.

This development is particularly ironic, as the industrial sector was intended to be the primary beneficiary of Trump's tariff policy. The administration had argued that high tariffs on imported goods would boost domestic production and create manufacturing jobs. Reality has proven the opposite. The manufacturing sector has steadily lost jobs since the introduction of the "Liberation Day" tariffs in April 2025. Between 59,000 and 67,000 manufacturing jobs have been lost in total. 42,000 jobs have been lost since the April announcement alone. The total number of manufacturing job losses over the course of 2025 is estimated at over 70,000.

The reasons for this paradoxical development are multifaceted. Many manufacturing companies are not only producers but also importers of intermediate products, raw materials, and components. The tariffs significantly increase the price of these inputs, dramatically raising production costs. Companies that rely on imported steel and aluminum products report exploding costs. Tariffs on these materials have been increased from 25 percent to 50 percent, reaching effective rates of 40 percent. For capital-intensive industries such as mechanical engineering and the automotive sector, this represents a fundamental deterioration in competitiveness, as they can neither pass on these costs in full nor offset them through efficiency gains.

Consumer goods and health: The crisis is spreading

The consumer discretionary sector, traditionally particularly vulnerable to economic fluctuations, follows in second place with 85 bankruptcies. This category includes companies in the fashion, home furnishings, leisure goods, and upscale retail sectors. The problems facing this sector are twofold. On the one hand, these companies are suffering from inflation-driven consumer restraint, with consumers increasingly foregoing non-essential spending. On the other hand, many of these firms are heavily dependent on imports, especially from Asian countries such as China, Cambodia, and Vietnam. The tariff burden therefore hits them particularly hard.

The example of the retail chain Claire's, which filed for bankruptcy in August 2025, vividly illustrates this problem. The company sourced the majority of its products—from earrings and hairbands to keychains—from China, Cambodia, and Indonesia. Tariffs made this import strategy increasingly unprofitable, while at the same time consumer demand for such discretionary products declined. A price increase to compensate for the rising costs would have further dampened demand, while maintaining prices would have destroyed margins. This balancing act proved impossible.

With 46 bankruptcies, the healthcare sector completes the three hardest-hit industries. While this sector is traditionally considered recession-resistant, the effects of structural changes in the American healthcare system, exacerbated by macroeconomic pressures, are evident here. Outpatient care providers and specialized service providers are particularly affected, facing pressure from both regulatory requirements and altered reimbursement structures.

Geographical concentration of economic disruptions

The geographical distribution of corporate bankruptcies reveals interesting patterns that reflect both the economic structure of the various states and the specific effects of tariff policies. California leads the statistics with 2,975 business bankruptcies in 2024, representing a 21.3 percent increase compared to 2023. However, this high number also reflects the sheer size of the Californian economy and its importance as a trade and technology hub. The rate is approximately 119 bankruptcies per 100,000 inhabitants, placing California in the middle range nationally.

Texas follows with 3,176 corporate bankruptcies, a rise of 10.5 percent. The state, which has positioned itself as a business-friendly alternative to California, demonstrates that even lower taxes and less regulation cannot insulate against macroeconomic shocks. Florida recorded 1,995 bankruptcies, a significant increase of 26.5 percent, indicating particular vulnerabilities in the "Sunshine State." Florida's economy is heavily dependent on consumption, especially in the tourism and retail sectors, and therefore exhibits heightened sensitivity to declining purchasing power.

Delaware occupies a unique position with 1,586 bankruptcies, a dramatic increase of 49.5 percent. However, this figure reflects less the economic situation of the small state than its role as a preferred jurisdiction for bankruptcy proceedings. Due to its business-friendly legislation, many companies choose Delaware as their bankruptcy jurisdiction, even if their operational centers are located elsewhere. The Central District of California recorded 1,633 business bankruptcies, followed by the District of Delaware with 1,586 and the Southern District of Texas with 1,252 cases.

Looking at the per capita statistics reveals a more nuanced picture. Alabama leads with 527.3 bankruptcies per 100,000 residents, followed by Georgia with 514.6 and Mississippi with 483.1. These figures reflect structural economic challenges in the southern states, where lower average incomes, higher debt ratios, and greater exposure to volatile sectors converge. Tennessee and Kentucky follow with 478.9 and 472.5 bankruptcies per 100,000 residents, respectively. These states have relied heavily on manufacturing in recent decades and are therefore particularly affected by the disruptions in the industrial sector.

Customs policy as a catalyst for the crisis

The Trump administration's tariff policy represents a historic break in its scale and speed. At the beginning of 2025, the average effective tariff rate in the United States was only 2.2 to 2.5 percent. This rate had been established over decades and reflected the consensus of liberalized trade relations that had shaped American trade policy since the end of World War II. Within a few months, however, this rate exploded to unprecedented levels.

By September 2025, the effective tariff rate had reached 10.65 percent, an increase of over 383 percent compared to January. In November 2025, estimates from various institutions ranged between 15.8 and 16.8 percent, the highest levels since 1943 and 1935, respectively. These figures surpass even the protectionist measures of the 1930s, which are considered a catalyst for the Great Depression. The Yale Budget Lab puts the effective tariff rate after consumption substitution at 14.4 percent, while the upstream rate is 16.8 percent.

The evolution of China's tariffs illustrates the volatility and scale of trade escalation. On April 2, 2025, the administration announced a country-specific reciprocal tariff of 34 percent on Chinese goods. Just six days later, on April 8, this rate was increased to 84 percent, before rising to 125 percent on April 9. This unprecedented escalation, occurring within a single week, caused massive uncertainty and disruption in global supply chains. Many companies had already placed orders, signed contracts, and arranged deliveries when the cost structure fundamentally changed.

In May 2025, a dramatic reversal occurred. Following negotiations between Chinese Vice Premier He Lifeng and American trade representatives Scott Bessent and Jamieson Greer, a reduction of the reciprocal tariff from 125 percent to just 10 percent for a period of 90 days was agreed upon on May 12. The additional 20 percent tariff on fentanyl initially remained in place, bringing the total burden to 30 percent. This agreement was extended in August and finally, in October, following a meeting between President Trump and President Xi Jinping in Busan, South Korea, was extended until November 2026. At the same time, the fentanyl tariff was reduced to 10 percent.

This extreme volatility has devastating effects on business planning and investment decisions. Companies need planning certainty for procurement, production, and pricing. When tariffs can change by 91 percentage points within a few days, rational economic calculations become impossible. Companies react to this uncertainty by being reluctant to invest and hire, which dampens economic growth. The Manufacturing ISM Reports show that uncertainty about tariff policy is cited as the main reason for declining new orders and shrinking production.

Planning uncertainty and macroeconomic costs

The macroeconomic costs of tariff policies are substantial. Studies by the Peterson Institute for International Economics predict that tariffs will reduce US GDP growth by 0.5 percentage points in 2025 and 0.4 percentage points in 2026. The Tax Foundation estimates the long-term negative effect at 0.8 percent of GDP. The ifo Institute in Germany warns that for every dollar of additional tariff revenue, GDP could fall by $1.80 if higher tariffs of 20 percent were implemented. These figures illustrate that tariffs not only act as a tax on imports but also create a multiplier effect through losses in efficiency and productivity, which negatively impacts overall economic growth.

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The burden on the shoulders of households

Tariff policies are proving to be a massive burden on American households, which ultimately bear the brunt of these protectionist measures. Analyses by the Joint Economic Committee of Congress, based on Treasury Department data and Goldman Sachs estimates of tariff pass-through, show that American consumers incurred nearly $159 billion in additional tariff costs between February and November 2025. This equates to an average of $1,197 to $1,200 per household for that period.

Particularly alarming is the development of the monthly burden. In February, when the tariffs were first implemented, the average burden per household was less than $60. In April, after the tariffs were expanded, this rose to over $80 and has continued to increase steadily ever since. By November 2025, the monthly burden reached $181.29 per household, with total costs of $24.04 billion. If this level of burden persists, American families would pay an average of $2,100 next year due to tariffs alone.

Economist Kimberly Clausing of the University of California, Los Angeles, who worked as a tax official in the Treasury Department during the Biden administration, calls the Trump tariffs the most significant tax increase for American consumers in a generation. She estimates the annual burden on an average household at about $1,700. Jeffrey Sonnenfeld, a professor at the Yale School of Management, emphasizes that companies are aware of the affordability crisis facing American consumers. They are trying to absorb the tariff costs and avoid price increases, but this is squeezing margins and jeopardizing the viability of many firms.

Goldman Sachs' analysis of tariff pass-through shows that approximately 40 percent of the tariff burden is borne by American consumers, another 40 percent by American companies, and only 20 percent by foreign exporters. This distribution refutes the oft-repeated claim by the Trump administration that China or other countries would pay the tariffs. In reality, the burden falls primarily on American actors, with consumers and businesses affected equally.

The impact on consumer behavior is already clearly measurable. Morgan Stanley forecasts a slowdown in nominal consumption growth from 5.7 percent in 2024 to 3.7 percent in 2025 and further to 2.9 percent in 2026. Deloitte anticipates a decline in real consumption growth from 2.6 percent in 2025 to just 1.6 percent in 2026. Discretionary consumption is particularly affected. Surveys show that 32 percent of consumers have already changed their spending habits due to the threat of tariffs. The University of Michigan's Consumer Sentiment Index fell to 55.1 points in September 2025, its lowest level since May, and a further decline from 58.2 in August.

Households' readily available cash has declined significantly. The average American household has $9,869 in easily accessible cash, a 10 percent decrease from 16 months ago. Households struggling to pay their bills have only $2,336 available, a 27 percent decrease. This erosion of financial buffers makes households more vulnerable to unexpected expenses and increases the tendency to postpone or forgo discretionary purchases.

Consumers are responding to these pressures by shifting their spending patterns. Spending on non-essential goods and services is declining, while essential expenses such as food, housing, and energy are claiming a larger share of the budget. The Federal Reserve reports that urban consumers are now paying about 25 percent more for the same basket of goods than they were five years ago. This cumulative inflation is forcing households to switch to cheaper products, postpone discretionary purchases, and adjust their expectations of financial security.

Industry-specific disruptions: The decline of the solar industry

The solar energy industry exemplifies how the combination of tariff policies, subsidy cuts, and macroeconomic pressures can destabilize entire sectors. In 2025, nine major solar service companies filed for bankruptcy or initiated comprehensive restructurings. This wave of bankruptcies is hitting an industry that, until recently, was considered a growth engine of the American economy and central to the energy transition.

Sunnova Energy International, one of the largest providers of residential solar power systems, initiated a comprehensive business restructuring in June 2025. The company reported debt liabilities of $8.9 billion and assets and liabilities ranging from $10 billion to $50 billion. Sunnova cited rising interest rates, weaker-than-expected customer demand, and uncertainty regarding federal tax credits for solar energy as the primary reasons for its financial distress.

SunPower Corporation, once an industry innovator, filed for Chapter 11 bankruptcy protection in August 2024. The company listed assets and liabilities in the range of $1 billion to $10 billion and cited ongoing losses, accounting problems, and intense competition from lower-cost rivals both domestically and internationally. As part of its restructuring, SunPower announced an agreement with Complete Solaria, Inc., the "stalking-horse bidder," to sell its New Homes business, Blue Raven Solar division, and dealer network for approximately $45 million in cash.

Mosaic Inc., one of the largest providers of residential solar loans in the U.S., filed for Chapter 11 bankruptcy protection in June 2025. Mosaic had financed more than one million solar installations nationwide and partnered with installers across the country. The bankruptcy followed increasing loan defaults, dwindling access to capital due to high interest rates, and political uncertainty regarding the future of federal tax credits. Mosaic's failure had cascading effects on the entire industry, as many smaller installers relied on Mosaic as a financing partner.

PosiGen, a Louisiana-based solar installation company, filed for Chapter 11 bankruptcy protection in November 2025. In its bankruptcy filing, the company explicitly cited steep tariffs on imported materials necessary for constructing solar projects, including solar panels, inverters, mounting systems, and structural steel. The Trump administration had deprioritized the expansion of renewable energy and eliminated tax breaks that made solar panels more affordable for homeowners.

The effective tariff rate on imported solar cells and panels climbed to about 20 percent after May 2025, compared to less than 5 percent in previous years. Federal data analyzed by Jason Miller, an economics professor at Michigan State University, shows that American solar importers paid nearly $70 million a month in import tariffs for the most common panel type in the second half of the year. Miller explains that this represents a significant strain on cash flow, especially for smaller importers. Combined with reduced federal incentives, which negatively impact demand, this creates a "perfect storm" for increased bankruptcies.

The solar industry is also grappling with structural challenges exacerbated by macroeconomic conditions. Rising interest rates have made solar loans less attractive to homeowners. According to the EnergySage Solar Marketplace Intel Report 2023, average monthly payments increased by 13 percent year-over-year. With declining sales and rising overhead costs, many companies have been forced to cease operations.

Policy changes also have a massive impact. California's transition from NEM 2.0 to NEM 3.0 reduced feed-in tariffs for solar exports by up to 75 percent, leading to an 80 percent drop in rooftop installations in the state in 2023. Companies like Infinite Energy, heavily reliant on the California market, were forced to cancel projects and lay off staff. The elimination of the federal homeowner tax credit after 2025 could accelerate this trend nationwide. Without this 30 percent financial cushion, thousands of contractors and small solar companies could struggle to compete, especially those already facing reduced demand and rising costs.

Retail Apocalypse 2.0: The retail sector under pressure

The American retail sector is experiencing a new wave of closures and bankruptcies, reminiscent of the "retail apocalypse" of the late 2010s, but exacerbated by new factors. In 2025, over 8,100 stores closed in the US, an increase of approximately 12 percent compared to 2024. These figures reflect not only the ongoing structural shift toward e-commerce, but also the acute pressures of inflation, tariffs, and changing consumer patterns.

Party City, the iconic party supply retailer, symbolizes the tragedy of this trend. The company filed for bankruptcy for the second time in two years in December 2024, announcing its complete liquidation after nearly four decades in business. CEO Barry Litwin informed company employees in a video conference that Party City would cease operations immediately. Employees were told they would not receive any severance packages and that their benefits would end with the closure of the business.

Party City had only emerged from its first bankruptcy protection in October 2023, after reducing nearly a billion dollars in debt. However, the company still had $800 million in debt when it came out of bankruptcy protection. In the 14 months following its exit, Party City faced industry-wide challenges, including inflation, a retreat in discretionary spending, shifting consumer preferences, and shrinking margins. Chief Restructuring Officer Deborah Rieger-Paganis cited these factors in court documents as being decisive in the company's eventual failure.

Party City faced increased competition from specialized pop-up stores like Spirit Halloween, which had expanded their presence, as well as from mass-market retailers like Target and Amazon, which had broadened their party supply offerings. Neil Saunders, Managing Director at GlobalData, commented that Party City's continued failure was likely inevitable. A downturn in demand for party products continued to put pressure on the business. This was due to two factors: increased competition and a more constrained consumer.

Dollar Tree, another major discount retailer, closed approximately 1,000 stores and sold its Family Dollar brand for roughly one billion dollars, having acquired it for nine billion dollars in 2015. Dollar General closed 141 stores, citing the challenges of operating in urban areas. These developments in the discount sector are particularly noteworthy because these chains are traditionally considered recession-proof and should even benefit during economically difficult times when consumers seek cheaper alternatives.

The fabric and craft chain Joann ceased operations in early 2025, unable to compete with online retailers offering lower prices. This case illustrates the ongoing disruption caused by e-commerce, exacerbated by current pressures. Specialized retailers with limited product ranges are particularly vulnerable, as they lack both the diversification of large chains and the cost advantages of pure online retailers.

Spirit Airlines, while not technically a retailer, shares many structural problems with the sector and symbolizes the challenges of consumer-centric business models. The ultra-low-cost carrier filed for bankruptcy for the second time in a year in August 2025. Spirit had only emerged from Chapter 11 protection in March 2025 after creditors agreed to convert $795 million of debt into equity. However, the airline did not implement drastic cost-cutting measures, such as fleet reductions or significant network reductions.

The renewed bankruptcy followed persistently high costs and a decline in domestic demand for air travel. In a court filing in December, Spirit had projected a net profit of $252 million for the year, but reported a loss of nearly $257 million from March 13 to the end of June after exiting Chapter 11 bankruptcy protection. The airline had warned a few weeks earlier that it might struggle to make it through the year without substantial cash injections. Spirit also stated that its credit card processor was demanding additional collateral. As a result, Spirit drew down its entire $275 million revolving credit facility.

These examples illustrate a consistent pattern: Companies with high import dependency, limited pricing power, and exposure to discretionary consumer spending find themselves in an existential dilemma. They can neither fully pass on the increased costs nor compensate for them on their own. Consumers, themselves suffering from a loss of purchasing power, react to every price increase with reluctance to buy. The result is an erosion of margins, ultimately leading to insolvency.

Legal uncertainty: The Supreme Court and the IEEPA tariffs

The legal basis for a significant portion of the Trump tariffs is the subject of intense legal battles, adding further uncertainty to an already volatile situation. At the heart of the matter is whether the International Emergency Economic Powers Act (IEEPA) of 1977 authorizes the president to impose sweeping trade tariffs. On April 14, 2025, a group of five companies filed a lawsuit with the Court of International Trade (CIT), challenging the reciprocal tariffs that President Trump had imposed after declaring a national emergency.

The plaintiffs argued that IEEPA did not grant the president the authority to impose the challenged tariffs. They asserted that the authority to impose tariffs must be granted clearly and unambiguously, and could not be granted through any implication so vague and indefinite that it had gone unnoticed by every other president for nearly five decades. Additionally, the plaintiffs maintained that even if IEEPA did grant this authority to the president, it would constitute an unconstitutional delegation of legislative authority.

The Court of International Trade ruled in favor of the plaintiffs, finding that IEEPA did not authorize the tariffs. The challenged orders were permanently prohibited. Because the court determined that IEEPA did not authorize the tariffs, it did not address the question of whether the delegation was unconstitutional. The government appealed this decision to the U.S. Court of Appeals for the Federal Circuit.

The Court of Appeals limited its deliberations to the question of whether the tariffs imposed by the challenged executive orders were authorized by IEEPA. The court ruled that they were not. In reaching this conclusion, the Court of Appeals relied on the text of IEEPA, the legislative history, and similar trade statutes. The court noted that IEEPA's authority, which allows the President to regulate imports, does not include the power to impose sweeping tariffs. The court observed that IEEPA does not contain the word "tariff" or any of its synonyms, such as "tax" or "duty.".

The court argued that the history and purpose of IEEPA conflicted with President Trump's tariffs. It noted that since the passage of IEEPA, not a single president had invoked his authority to impose tariffs. The court observed that IEEPA was specifically enacted to limit the president's powers and further concluded that it seemed unlikely Congress, in passing IEEPA, intended to depart from its established practice of granting the president unlimited authority to impose tariffs.

Despite this finding, the Court of Appeals declined to uphold the CIT's decision to suspend and block the challenged tariffs. The tariffs remain in effect for the time being. In its decision, the Court relied on Trump v. CASA, Inc., where the Supreme Court had ruled that the requested preliminary injunctions were broader than necessary to provide full relief to every plaintiff with standing. The Court of Appeals remanded the case to the CIT, instructing it to first determine whether its grant of a universal preliminary injunction met the standards set forth by the Supreme Court in CASA.

The government appealed the CIT's decision to the Supreme Court, which ordered a hearing. On September 9, 2025, the Supreme Court granted a request for expedited hearings and scheduled oral arguments for November 5, 2025. Two questions were submitted for consideration: First, whether IEEPA permits a president to impose tariffs after declaring a national emergency. Second, if IEEPA authorizes the tariffs, whether the law unconstitutionally delegates legislative power to the president.

The Supreme Court's decision will have significant political and economic implications, regardless of the outcome. A ruling in favor of the president would likely allow further tariffs under the IEEPA and extend the statute's powers to future administrations. A ruling in favor of the plaintiffs would likely result in the complete repeal of the challenged tariffs. Given the tariffs' impact to date, this option would have substantial consequences for the American economy.

This legal uncertainty exacerbates the already difficult situation for businesses. Importers don't know whether they might be entitled to tariff refunds, complicating their financial planning. At the same time, they cannot rely on current tariff rates remaining in place. Some analysts expect that even an unfavorable Supreme Court ruling would not significantly alter the Trump administration's tariff strategy. JPMorgan, in a December analysis, pointed out that even with an unfavorable decision, tariffs would likely remain close to current levels, with the administration potentially using Section 122 to maintain tariffs for 150 days and gain time to develop more permanent solutions.

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Monetary policy dilemma: The Federal Reserve between inflation and growth

The Federal Reserve is in an exceptionally difficult position. The central bank must balance combating inflationary tendencies, fueled in part by tariffs, with supporting a weakening economy. In 2025, the Fed implemented three interest rate cuts of 25 basis points each. In December 2025, the Federal Reserve lowered the benchmark interest rate to a target range of 3.5 to 3.75 percent, bringing the total cuts since September 2024 to a cumulative 1.75 percentage points.

These interest rate cuts are taking place in a complex economic environment. On the one hand, there are signs of a weakening labor market. The unemployment rate rose from historically low levels to 4.6 percent in November 2025. The Fed forecasts a further increase to 4.5 percent for 2025. On the other hand, inflation, at 2.7 percent in November, remains more persistent than desired and is above the Fed's target of 2 percent.

Tariffs contribute to this inflationary persistence. Studies predict that tariffs will increase inflation by about one percentage point, with this increase potentially being temporary, but price levels remaining permanently elevated. This presents the Fed with a dilemma. If it were to aggressively combat inflation and keep interest rates high or even raise them, this would further strain an already weakening economy and potentially trigger a recession. If it cuts interest rates too much, it risks entrenching inflation and eroding confidence in price stability.

Members of the Federal Open Market Committee (FOMC) are divided on the right course of action. At the December meeting, there were two dissenting votes, with two members voting for a freeze on interest rates, while the new FOMC Governor, Miran, advocated for a 50-basis-point cut. This divergence reflects the difficulty of determining the appropriate monetary policy in an environment distorted by trade policy interventions.

The Fed revised its 2025 growth forecast upward to 1.7 percent, but the outlook for 2026 remains subdued at 2.3 percent. PCE inflation is projected at 2.9 percent for 2025 and 2.4 percent for 2026. These forecasts indicate that the Fed anticipates a prolonged period of elevated inflation, which limits its monetary policy options.

The concept of the neutral interest rate, or "r-star," is central to the debate about appropriate monetary policy. R-star refers to the interest rate consistent with an economy expanding in line with its capacity, with resources fully employed and inflation at the central bank's target level. This rate is extremely difficult to determine and not directly observable. The Fed's own estimate places r-star at 3 percent, while estimates from individual FOMC participants range from 2.6 to 3.9 percent. This wide range explains why Fed Chair Jerome Powell has emphasized that policy is now entering the realm of neutral estimates.

Market prices offer an alternative perspective. The five-year forward swap rate, often considered a proxy for long-term equilibrium, is currently near 3.5 percent. This is above the Fed's central estimate but sends a similar signal: policy is approaching neutrality but remains restrictive. Importantly, interest rate-sensitive sectors like housing remain under pressure, and the labor market continues to lose momentum. These are tangible signs that policy is still weighing on economic activity.

Trade policy significantly complicates the Fed's task. Tariffs act as both a supply and demand shock. They increase input costs for businesses, which has an inflationary effect, but at the same time dampen economic growth and employment. These stagflationary tendencies are particularly difficult for central banks to combat because the usual monetary policy instruments cannot address both problems simultaneously. Lowering interest rates to stimulate the economy risks higher inflation. Raising them to combat inflation exacerbates the risk of recession.

Structural disruptions and long-term implications

The wave of bankruptcies and trade policy disruptions of 2025 have the potential to trigger lasting structural changes in the American economy. While the reallocation of resources that accompanies any major wave of bankruptcies may lead to a more efficient economic structure in the long term, it incurs significant social and economic costs in the short term.

The concentration of bankruptcies in the industrial sector is particularly worrying, as this is precisely the area the government supposedly intended to strengthen. The irony is that a policy explicitly aimed at revitalizing American manufacturing has ultimately contributed to the accelerated decline of this sector. The 59,000 to 67,000 manufacturing jobs lost represent not just statistical figures, but concrete individual tragedies in regions already suffering from structural change.

The geographic distribution of these job losses is often concentrated in the so-called "Rust Belt" and other regions that have already experienced deindustrialization in recent decades. These regions were central to Trump's 2024 election campaign message that he would bring back jobs through trade policies. The disappointment of these expectations could have long-term political and social consequences.

The destruction of capital through bankruptcies is also substantial. In the first half of 2025, 17 mega-bankruptcies affected companies with assets exceeding one billion dollars. The value of these assets is typically significantly reduced by the bankruptcy proceedings, resulting in macroeconomic welfare losses. Investors, creditors, and bondholders suffer losses that can propagate through the financial system.

Uncertainty surrounding trade policy has delayed or prevented long-term investment decisions. Companies need planning certainty for major investments in production capacity, research and development, and human capital. The extreme volatility of tariffs—ranging from 34 percent to 125 percent and back to 10 percent within a few weeks—makes such long-term planning impossible. Even if tariffs were to stabilize at a certain level in the medium term, the threat of erratic changes would remain a Damocles' sword hanging over every investment decision.

The end of efficiency: Supply chains in upheaval

The disruption of global supply chains has repercussions that extend far beyond direct tariff costs. Decades of globalization have created highly specialized and finely tuned production networks in which components cross borders multiple times before being incorporated into final products. This efficiency relied on reliability and low transaction costs. Tariffs destroy both of these prerequisites. Companies must now either bear significantly higher costs or undertake complex and expensive restructuring of their supply chains.

The adjustment costs of such restructurings are substantial. New supplier relationships must be established, quality standards verified, logistics reorganized, and contracts renegotiated. For medium-sized and smaller companies, these costs can be prohibitive. Large multinational corporations have the resources and know-how to adapt their supply chains, but even they experience efficiency losses in the process. The result is a reallocation of economic activity driven not primarily by efficiency considerations, but by tariff avoidance—an inefficient allocation by definition.

Consumers will have to live with permanently higher price levels in the long term. Even if inflation normalizes, the price increases induced by tariffs will persist. This means a permanent reduction in real purchasing power, especially for low- and middle-income households, which spend a larger share of their budget on tradable goods. The regressive effect of tariffs—they disproportionately burden poorer households—exacerbates existing inequalities.

Fiscal illusions and international boomerang effects

The fiscal implications are also substantial. While the government argues that tariffs generate significant revenue that can be used to fund tax cuts or other programs, these calculations overlook the indirect effects. The ifo Institute warns that for every dollar of additional tariff revenue, GDP could shrink by as much as $1.80. Shrinking GDP means reduced tax revenue from other sources, particularly income tax. On balance, the net fiscal gains from tariffs could be significantly lower than hoped or even negative when the negative growth effects are taken into account.

The international dimension must not be overlooked. American trade policy has triggered retaliatory measures from trading partners. China imposed tariffs on American agricultural products, resulting in significant losses for American farmers. Other countries have also taken retaliatory measures. These cycles of retaliation reduce global trade volume and world economic growth, ultimately harming the American economy as well. The erosion of multilateral trade structures and the rise of bilateral deals increase transaction costs and uncertainty for all involved.

America's new reality in 2026: Fewer jobs and the direct consequences of tariff policy

A toxic cocktail for the economy: Rising unemployment despite persistent inflation.

The available forecasts for 2026 offer little cause for optimism. Most analysts expect tariffs to remain at around 15 percent. Bloomberg Economics notes that the global economy must now adjust to the reality of American protectionism. Even if the Supreme Court were to rule against the IEEPA tariffs, experts expect these tariffs to be quickly replaced, and rates would largely remain where they are now.

Consumer behavior will continue to adjust. Morgan Stanley forecasts that growth in consumer spending will slow from 3.7 percent in 2025 to 2.9 percent in 2026. Deloitte sees real consumption growth at just 1.6 percent for 2026. This slowdown will impact the entire economy, as consumer spending accounts for roughly 70 percent of U.S. GDP. Weakening consumer demand will push more companies into financial difficulties, potentially perpetuating the wave of bankruptcies.

The labor market remains a critical indicator. The Yale Budget Lab estimates that the unemployment rate will be 0.3 percentage points higher by the end of 2025 and 0.6 percentage points higher by the end of 2026 than it would have been without the tariffs. Employment will be 490,000 lower by the end of 2025. These figures may seem moderate in the context of an economy the size of the United States, but they represent hundreds of thousands of individual lives and have multiplied effects on consumption and investment.

The Yale Budget Lab estimates that GDP will remain 0.3 percent lower in the long term, amounting to roughly $90 billion annually in 2024, while exports will be 16 percent lower. These long-term effects are particularly worrying because they suggest that tariff policies are not merely generating temporary adjustment costs, but are causing lasting damage to the productivity and competitiveness of the American economy.

The political dimension cannot be ignored. President Trump is under increasing pressure as his approval ratings for economic policies have declined. According to polls, a majority of Americans believe that the long-term effects of the administration's tariff policies will be predominantly negative for the country and for them and their families. This dissatisfaction could translate into future elections and alter the political landscape.

At the same time, the administration seems reluctant to fundamentally deviate from its course. Trump himself has proclaimed on TruthSocial that tariffs create prosperity and unprecedented national security for the United States. Trade Representative Jamieson Greer emphasized that 2025 would be remembered as the year tariffs returned and asserted that the plan was working. This rhetoric suggests that substantial policy changes are unlikely, regardless of the empirical evidence of negative effects.

The challenge for the American economy is to adapt to a new equilibrium characterized by higher trade barriers, greater uncertainty, and reduced integration into global value chains. This adaptation comes at a significant cost and is expected to take several years. In the meantime, more companies will face financial difficulties, jobs will be lost, and wealth will be eroded.

The fundamental question remains whether policymakers will learn from the experiences of 2025 and adjust their policies accordingly, or whether an ideological fixation on protectionism will prevent evidence-based policy adjustments. Historical evidence—from the Smoot-Hawley tariffs of the 1930s to more recent experiences with trade wars—suggests that protectionist measures rarely deliver the promised benefits but often produce unexpected and counterproductive consequences. The developments of 2025 add another troubling chapter to this historical record.

The wave of bankruptcies that has gripped the American economy is not primarily the result of cyclical fluctuations or exogenous shocks, but rather the direct consequence of deliberate trade policy decisions. The irony lies in the fact that a policy that purported to protect American businesses and workers has ultimately led to their widespread harm. This discrepancy between proclaimed goal and actual outcome raises fundamental questions about the quality of economic policy advice and the role of empirical evidence in political decision-making. The coming years will show whether American policymakers are capable of internalizing this lesson and taking corrective action, or whether the chosen protectionist trajectory will continue—with all the associated costs to prosperity, employment, and economic dynamism.

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