Unbroken dynamism of the US economy: The Trump enigma or explainable psychology? – Image: Xpert.Digital
Stronger than expected: 5 reasons and one more reason why the US economy is defying the crisis
Why did many economists expect a recession?
The inauguration of Donald Trump as the 45th President of the United States caused considerable concern among economic experts. At the beginning of 2025, numerous forecasts painted a bleak picture for the American economy. The reasons for these pessimistic expectations were manifold and seemed quite justified.
Harvard economist Kenneth Rogoff, for example, predicted a slowdown in the US economy in the second half of Trump's term, with a likely downturn leading to recession. The renowned economist pointed to a number of measures Trump had hinted at and would implement. Rogoff considered a strong upswing followed by a slowdown leading to recession the most probable scenario, as this would be difficult to avoid within the business cycle.
Economists' main concerns focused on several key areas. First, the aggressive tariff policy of the new US administration, which caused considerable uncertainty. Trump announced drastic protectionist measures, including a general 10 percent trade tax on all US imports worldwide and even 60 percent tariffs on imports from China. This tariff policy created a climate of uncertainty, as Trump announced new tariffs daily and made erratic U-turns, which also unsettled businesses.
Secondly, experts feared the inflationary effects of Trump's policies. Economists predicted that the tariffs could lead to higher inflation and higher interest rates. Additionally, Trump's planned mass deportations of up to one million migrants would severely tighten the labor supply, particularly in manufacturing, and contribute to wage pressure and inflation.
The financial market reaction exacerbated these fears. Massive stock market declines, poor consumer sentiment, and a weakening labor market fueled concerns about a recession. The tech-heavy Nasdaq index experienced its worst day since 2022 in the spring of 2025, and the influential forecasting model of the regional Federal Reserve Bank of Atlanta predicted an annualized quarterly growth rate of minus 2.8 percent for the first quarter.
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What are the current economic data?
Contrary to gloomy forecasts, the US economy is showing remarkable resilience. The actual economic data for 2025 paints a significantly more positive picture than many experts had expected.
Gross domestic product grew at an annualized rate of 3.3 percent in the second quarter of 2025, a significant increase from the 0.5 percent decline in the first quarter. These figures considerably exceeded expectations and demonstrated the inherent strength of the American economy. The upward revision from the initial estimate of 3.0 percent to 3.3 percent was primarily due to positive developments in investment and consumer spending.
Growth was primarily driven by a 29.8 percent decline in imports, following a sharp rise in the first quarter as businesses and consumers stockpiled goods in anticipation of price increases following tariff announcements. At the same time, consumer spending rose by 1.6 percent, compared to 0.5 percent in the first quarter, underscoring the robustness of consumer demand.
Corporate profits also showed positive developments, rising from $3,203.60 billion in the first quarter to $3,266.20 billion in the second quarter of 2025. This suggests that American companies were able to maintain their profitability despite economic uncertainties.
Particularly noteworthy is the development of corporate investment. Capital investment rose by an impressive 7.6 percent at the beginning of 2025, the strongest pace since mid-2023. Companies increased their equipment investment by 4.8 percent and their software investment again significantly by 6.4 percent.
The technology sector remains a key growth driver. The US IT services market is projected to reach approximately $513.8 billion in 2025, with an expected compound annual growth rate (CAGR) of 3.73 percent through 2030. The software market is forecast to generate $345.6 billion in revenue in 2025, with enterprise software representing the dominant market segment at $145.2 billion.
How is the labor market developing?
Despite some fluctuations, the US labor market demonstrates a fundamental resilience that contributes to the strength of the overall economy. Current labor market data paints a mixed picture, revealing both challenges and enduring strengths.
The unemployment rate rose slightly in August 2025 from 4.2 percent in July to 4.3 percent, in line with market expectations and reflecting the highest unemployment rate since October 2021. However, this increase must be viewed in a historical context: since May 2024, the rate has fluctuated within a narrow range of 4.0 to 4.2 percent, indicating general stability in the labor market.
Employment trends are sending mixed signals. The US economy created 22,000 new jobs in August 2025, 38,000 of which were in the private sector. While these figures fell short of expectations, it's important to note that continued job losses in the public sector slightly skewed the overall picture. In April 2025, 177,000 jobs were created, exceeding expectations of 130,000.
A notable aspect is the continued resilience of the labor market despite economic uncertainties. Experts emphasize that the term used to describe the labor market in these reports is resilience, not recession. The healthcare sector continued to lead job growth, contributing 51,000 positions. Transportation and warehousing also saw an increase of 29,000 jobs.
The labor force participation rate rose by 0.1 percentage points to 62.3 percent, after climbing from its two-year low the previous month. This indicates that more people are actively participating in the labor market, which is a positive sign for economic momentum.
Wage growth remains robust. Average hourly wages rose by 0.2 percent, following a 0.3 percent increase in March, with annual wage growth holding steady at 3.8 percent in April. This is sufficient to maintain spending and support the economy, as wage growth has outpaced inflation.
What role does monetary policy play?
The Federal Reserve plays a crucial role in stabilizing the US economy and, through its monetary policy, has significantly contributed to preventing the feared recession so far. The central bank skillfully navigates between the challenges of a weakening labor market and the inflation risks posed by its tariff policy.
On September 17, 2025, the Fed cut its key interest rate by 25 basis points to a new range of 4.00 to 4.25 percent. This was the first interest rate cut since December 2024 and marked a significant turning point in monetary policy. Fed Chair Jerome Powell had effectively foreshadowed this move in Jackson Hole, and the again disappointing labor market data for August likely sealed the decision.
The Fed's new interest rate projections anticipate two further rate cuts by the end of 2025, as well as another easing step in 2026. This forward guidance signals to markets a continued easing of monetary policy, which helps to stabilize economic expectations.
The Fed, however, faces a complex dilemma. On the one hand, it must respond to the unexpectedly sharp deterioration of the labor market; on the other hand, it faces the threat of a surge in inflation due to the US government's tariff policies. Additionally, the central bank must fend off suspicions that it is loosening its monetary policy because of the persistent pressure for low interest rates from the White House, thereby risking a loss of credibility in the financial markets.
In his recent remarks, Jerome Powell emphasized that the Fed places greater emphasis on downside risks to the labor market than on upside risks to inflation. This prioritization makes the state of the labor market the primary reason for the impending monetary easing and explains why the central bank is willing to cut interest rates despite inflation concerns.
The market currently expects the key interest rate to fall below 3 percent by the end of 2026. This expectation is also politically influenced: Since Donald Trump became president again, the Fed has been under considerable pressure to provide early stimulus for growth and employment.
How are consumers and businesses reacting?
Consumer and business reactions to economic developments and policy measures present a complex picture of caution and continued activity. These mixed signals are a key factor in the US economy maintaining its resilience despite various headwinds.
Consumer confidence is showing significant fluctuations, reflecting the uncertainty created by political developments. The University of Michigan's consumer sentiment index fell to 55.4 points in September 2025, down from 58.2 points in August, significantly below market expectations of 58 points. This marked the second consecutive monthly decline and pushed sentiment to its lowest level since May.
Particularly noteworthy is that around 60 percent of respondents continued to cite tariffs as a major problem. The declines were most pronounced among lower- and middle-income households, while views on personal finances deteriorated by 8 percent. Nevertheless, sentiment remains 16 percent below the level of December 2024 and significantly below its historical average.
However, the discrepancy between consumer confidence and actual consumption behavior is interesting. Even between 2022 and 2024, many US citizens were pessimistic, yet private consumption increased by almost three percent per year during this period. Private consumption in the US rose from $16,291.80 billion in the first quarter of 2025 to $16,350.20 billion in the second quarter.
The key factor influencing consumer behavior remains the labor market. As long as unemployment is low and incomes rise, the total wage bill increases. Since little is saved in the US, this means that most of the money earned is spent immediately.
Companies are also showing mixed reactions. On the one hand, they have significantly increased their investment activity, as evidenced by the 7.6 percent rise in capital expenditures. Investments remain particularly robust in the technology sector, with large technology companies such as Alphabet, Amazon, Microsoft, and Meta expected to increase their capital expenditures from $90 billion in 2020 to over $270 billion in 2025.
On the other hand, companies are also showing caution. A survey by the Institute for Supply Management revealed a slight decline in sentiment among industrial firms, with orders falling significantly, while companies simultaneously anticipated higher prices.
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What are the structural strengths of the US economy?
The resilience of the US economy to the predicted recession risks can be attributed to several fundamental structural strengths that characterize the American economic system and distinguish it from other economies.
The flexibility of the American labor market represents a crucial advantage. Unlike many European countries with rigid labor laws, US companies can adapt more quickly to changing economic conditions. This flexibility is evident in their ability to react swiftly to both booms and busts, contributing to the overall stability of the system.
The US financial market boasts exceptional depth and liquidity. Home to the world's largest stock exchanges and with the dollar as the leading reserve currency, the American economy benefits from lower capital costs and easier access to financing. This allows companies to maintain their investment plans even in uncertain times.
The innovative strength of the American economic system is particularly evident in the technology sector. The USA is home to the world's leading technology companies and research institutions. The fields of artificial intelligence, quantum computing, and digital transformation are being driven primarily by American companies. This dynamic of innovation continuously creates new growth opportunities and jobs.
The diversification of the American economy provides additional stability. While the technology sector plays a prominent role, the economy rests on broad foundations. From finance and healthcare to agriculture and energy, the US has a balanced economic structure that can cushion shocks in individual sectors.
The size of the American domestic market represents a further structural advantage. With over 330 million inhabitants and one of the highest per capita purchasing powers worldwide, the US market offers sufficient demand to maintain a certain level of economic activity even in the face of international trade disruptions.
The American higher education system and research landscape continuously contribute to human capital development. The world's best universities attract talent from all over the globe, ensuring a steady flow of qualified professionals and innovative ideas.
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Tech as salvation? How long will Trump's psychological boost last for the economy?
What risks remain?
Despite the remarkable resilience of the US economy and the absence of a recession, significant risks remain that could threaten economic equilibrium. These risk factors require continued attention and could become greater challenges in the second half of Trump's term.
Tariff policy remains a Damocles' sword hanging over the economy. Although the immediate inflationary effects have so far been moderate, economists warn of the long-term consequences. The chaotic implementation of tariffs creates persistent uncertainty for companies that need to plan their investment and hiring decisions. Even if the quantitative inflationary effects are small, the uncertainty can dampen business confidence and lead to slower growth.
Immigration policy poses significant economic risks. According to estimates by the Peterson Institute, Trump's planned mass deportations could shrink the US economy by more than 7 percent by 2028. The sudden loss of workers would not only affect individual companies but could destabilize entire industries while simultaneously exacerbating inflationary pressures.
National debt is becoming an increasingly critical problem. The US House of Representatives approved raising the debt ceiling by $5 trillion to well over $40 trillion. The US is heading straight for a debt-to-GDP ratio of over 130 percent, putting it on par with Italy and Greece. Harvard economist Kenneth Rogoff even predicts a severe debt crisis within the next five years.
Monetary policy faces complex challenges. The Federal Reserve must navigate between supporting a weakening labor market and containing potential inflation risks. Jerome Powell emphasized that there is no risk-free path for monetary policy. Every future interest rate decision could introduce new risks, and the Fed risks losing credibility if it is perceived as too politically influenced.
Inflation is already showing signs of rising again. In August 2025, the annual inflation rate accelerated to 2.9 percent, the highest level since January. Core inflation remained stable at 3.1 percent, well above the Fed's target of 2 percent. Consumers' long-term inflation expectations rose for the third consecutive month, signaling a significant risk of future price increases.
How do experts assess the medium-term development?
Assessments by economic experts regarding the medium-term development of the US economy present a nuanced picture, reflecting both optimism and justified caution. While most analysts do not expect an immediate recession, they warn of increasing risks in the coming years.
Growth forecasts for the full year 2025 have stabilized. The Federal Reserve now expects GDP growth of 1.6 percent for 2025, after lowering its forecast to 1.4 percent in June. Other forecasters are operating in a similar range, with Trading Economics anticipating long-term US GDP growth of around 2.0 percent through 2026.
Labor market developments are considered a key indicator. Experts expect the unemployment rate to remain at around 4.3 percent in the coming quarters. Although this is still a low level by historical standards, the trend signals a weakening of labor market momentum.
Experts are particularly critical of the second half of Trump's term. Harvard economist Kenneth Rogoff predicts that the US economy will likely slow down and experience a downturn in the second half of his term. He sees the most probable scenario as a strong upswing followed by a slowdown leading to recession, due to the potential interplay of structural factors and policy measures.
Experts are increasingly concerned about inflation trends. While the immediate impact of the tariffs remained moderate, many analysts expect a gradual increase in price pressures. The Fed raised its own core inflation forecast for 2026 from 2.4 percent to 2.6 percent, reflecting these growing concerns.
Experts warn of increasing fragmentation of the international trading system. Ongoing trade conflicts and protectionist measures could lead to a fragmented global market that generates costs everywhere. This would negatively impact not only the American economy but global growth as a whole.
The technology sector continues to be seen as a growth driver, albeit with a changed dynamic. While a few tech giants dominated performance in 2024, experts expect a broadening of profit growth in 2025. This could make the US economy as a whole more resilient and diversified.
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What lessons can be learned?
The performance of the US economy in the first months of the Trump presidency offers valuable insights into the complexity of economic forecasting and the resilience of modern economies. The discrepancy between the gloomy predictions of many economists and actual economic developments raises fundamental questions about the limits of economic forecasting.
The first important finding concerns the limitations of Keynesian economic forecasts and the fallacy of ceteris paribus analysis. Many experts focused too heavily on individual factors such as tariffs or immigration policy, without adequately considering the dynamic adjustment mechanisms of the American economy. The US economy proved to be more adaptable and dynamic than many models suggested.
A second key takeaway concerns the importance of expectations. Although consumer confidence declined significantly, actual consumption expenditure remained robust. This demonstrates that the relationship between sentiment indicators and real economic activity is more complex than often assumed. Ultimately, fundamental factors such as employment and income are decisive.
The role of monetary policy as a stabilizing instrument was once again underscored. Through its communication strategy and timely interest rate cuts, the Federal Reserve was able to calm the markets and prevent a self-fulfilling recession prophecy. This demonstrates the importance of an independent and credible central bank for economic stability.
The structural strengths of the US economy, particularly the flexibility of its labor markets, its capacity for innovation, and the depth of its financial markets, have proven to be important buffers against external shocks. These institutional advantages can partially offset short-term political uncertainties and contribute to the resilience of the economy.
At the same time, these events serve as a warning against drawing hasty conclusions. The fact that a recession has so far been averted does not mean that all risks have been eliminated. The medium-term challenges posed by rising debt, potential trade wars, and demographic changes remain and could become more significant problems in the coming years.
Experience also demonstrates the importance of a nuanced understanding of economic relationships. Blanket predictions about the effects of specific policy measures often fail to do justice to the complexity of modern economies. Instead, reliable forecasts require a careful analysis of the interactions between various factors and an appropriate consideration of uncertainties.
Finally, this development underscores the need for continuous adaptation and a willingness to learn in economic policy. Both political decision-makers and economic actors must be able to react flexibly to changing circumstances and adjust their strategies accordingly.
The Trump puzzle ultimately reveals that the American economy possesses considerable self-healing powers, but these are not inexhaustible. The challenge for the future will be to preserve these strengths while simultaneously addressing the structural problems that could pose a long-term threat to economic stability.
The 50 Percent Psychology: Trump's Mental Influence on the US Economy
The 50 percent psychology: Trump's mental influence on the US economy – Image: Xpert.Digital
The phenomenon of US economic development under Donald Trump can be explained to a considerable extent by what the German Economics Minister Ludwig Erhard recognized during the post-World War II economic miracle: “Economics is 50 percent psychology.” This insight proves to be key to understanding the “Trump riddle”—why the American economy is showing remarkable resilience despite gloomy expert forecasts.
The psychological factor manifests itself in several dimensions of the current US economic situation. First, Trump's communication strategy acts as a catalyst for economic expectations. His constant promises of an economic upswing and the return of American jobs create a sense of optimism among parts of the population and the business community. This positive attitude translates into real economic activity: companies invest in anticipation of better times, and consumers continue to spend money despite uncertainties.
Paradoxically, Trump's disruption strategy also has a psychologically stimulating effect. While the constant announcements of new tariffs and political U-turns create uncertainty, they also generate a form of "creative tension." Businesses and investors are forced to react and adapt more quickly—which, ironically, reinforces the often-praised flexibility of the American economy. The expectation that things could constantly change leads to a greater willingness to act rather than paralysis.
The wealth effect plays a central role in the psychological dimension. Although the stock markets reacted volatilely, long-term losses remained limited. Many Americans who have invested in stocks through their retirement plans are not yet experiencing dramatic losses. As long as portfolios remain stable, confidence in one's own financial situation—and thus the willingness to consume—remains.
The discrepancy between sentiment and behavior illustrates the psychological mechanism particularly vividly. While the University of Michigan's consumer confidence index fell to 55.4 points in September 2025, actual consumer spending rose in the second quarter from $16,291.80 billion to $16,350.20 billion. Americans talk pessimistically but continue to act optimistically—a classic example of how psychological factors are more complex than simple sentiment barometers suggest.
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Trump’s “America First” narrative
Trump's "America First" narrative fosters a psychological identification with economic success. The message that America is "winning" again mobilizes emotional resources, which translate into increased risk tolerance in investments and consumer decisions. This patriotic component of economic psychology should not be underestimated—it can motivate decisions that are difficult to justify rationally.
The dynamics of expectations function as a self-reinforcing mechanism. As long as enough actors believe that Trump's policies will be successful in the medium term, they will act accordingly—and thus contribute to their actual success. This self-fulfilling prophecy explains why the economy has so far defied the apocalyptic scenarios of many economists.
However, the psychological component also carries significant risks. Economic psychology can quickly reverse course if real-world results deviate too much from expectations. As soon as unemployment rises noticeably or inflation significantly strains household budgets, psychological support for Trump's policies could crumble – with correspondingly negative consequences for economic development.
The psychological factor also explains why expert forecasts are so often wrong. Economists traditionally focus on quantifiable factors such as tariffs, interest rates, or trade balances. The “soft” psychological factors—trust, expectations, emotional attachments—are difficult to integrate into mathematical models, but often have a decisive influence on actual economic events.
The Trump phenomenon impressively confirms Ludwig Erhard's insight: psychology actually accounts for roughly 50 percent of economics. As long as Trump manages to control psychological expectations and maintain confidence in the economic future, his administration can compensate for even objectively problematic policies. The crucial question is how long this psychological effect lasts and whether it is strong enough to cushion even major economic shocks.
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