Unbroken momentum of the US economy: The Trump conundrum 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 predictions painted a bleak picture for the American economy. The reasons for these pessimistic expectations were varied and seemed entirely 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 and even recession. The renowned economist pointed to a series of measures that Trump had hinted at and would implement. Rogoff saw the most likely scenario as a strong recovery followed by a slowdown and even a recession, as this would be difficult to avoid within the economic cycle.
The 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 trade tax of 10 percent 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 punitive tariffs daily and performed crazy about-turns, which also caused uncertainty among companies.
Second, experts feared the inflationary effects of Trump's policies. Economists predicted that the tariffs could lead to higher inflation and higher interest rates. In addition, Trump's planned mass deportations of up to one million migrants would severely tighten the labor supply, especially in the manufacturing sector, and contribute to wage pressure and inflation.
The financial market reaction exacerbated these fears. Massive stock market losses, poor consumer confidence, and a weakening labor market fueled fears of a recession. The Nasdaq tech index had its worst day since 2022 in spring 2025, and the influential forecast model of the regional central bank, Fed Atlanta, projected annualized quarterly growth of minus 2.8 percent for the first quarter.
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What are the current economic data?
Contrary to the gloomy forecasts, the US economy is showing remarkable resilience. Actual economic data for 2025 paint a significantly more positive picture than many experts 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 significantly 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 ahead of expected price increases following the tariff announcements. At the same time, consumer spending rose by 1.6 percent compared to 0.5 percent in the first quarter, underscoring the resilience 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 indicates that American companies were able to maintain their profitability despite the economic uncertainties.
The development of business investment is particularly noteworthy. Fixed asset 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 software investment again significantly by 6.4 percent.
The technology sector remains a key growth driver. The IT services market in the US is expected to reach approximately $513.8 billion in 2025, with an expected annual growth rate of 3.73 percent through 2030. The software market is forecast to generate revenue of $345.6 billion in 2025, with enterprise software being the dominant market sector at $145.2 billion.
How is the labor market developing?
Despite some fluctuations, the US labor market demonstrates fundamental resilience, contributing to the strength of the overall economy. Current labor market data paint a nuanced picture, revealing both challenges and continued strengths.
The unemployment rate rose slightly from 4.2 percent in July to 4.3 percent in August 2025, in line with market expectations and reflecting the highest proportion of unemployment since October 2021. However, this increase must be viewed in a historical context: the rate has fluctuated within a narrow range of 4.0 to 4.2 percent since May 2024, indicating general stability in the labor market.
Employment trends are showing 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 were below expectations, it's important to note that ongoing job cuts in the public sector slightly distorted the overall picture. In April 2025, 177,000 jobs were created, exceeding expectations of 130,000.
One notable aspect is the continued resilience of the labor market despite economic uncertainty. Experts emphasize that the term used to describe the labor market in these reports is resilience, not recession. Healthcare continued to lead job growth, contributing 51,000 jobs. Transportation and warehousing also recorded an increase of 29,000 jobs.
The labor force participation rate rose by 0.1 percentage points to 62.3 percent, having risen from a more than two-year low in the previous month. This indicates that more people are actively participating in the labor market, a positive sign for economic momentum.
Wage growth remains robust. Average hourly earnings rose by 0.2 percent, following a 0.3 percent increase in March, with annual wage growth remaining stable at 3.8 percent in April. This is sufficient to sustain spending and support the economy, as wage growth outpaced inflation.
What role does monetary policy play?
The Federal Reserve plays a crucial role in stabilizing the US economy, and its monetary policy has contributed significantly to the fact that the feared recession has so far avoided a reversal. The central bank skillfully navigates the challenges of a weakening labor market and the inflation risks posed by tariff policy.
On September 17, 2025, the Fed lowered its key interest rate by 25 basis points to a new range of 4.00 to 4.25 percent. This was the first rate cut since December 2024 and marked a major turning point in monetary policy. Fed Chairman Jerome Powell had already effectively anticipated this move in Jackson Hole, and the further disappointing labor market data for August likely sealed the decision.
The Fed's new key interest rate projections envisage two further rate cuts by the end of 2025 and one further easing step in 2026. This forward guidance signals to the markets a continued easing of monetary policy, which contributes to stabilizing economic expectations.
However, the Fed faces a complex dilemma. On the one hand, it must respond to the unexpectedly significant deterioration in the labor market situation, while on the other, it faces the threat of a surge in inflation due to the US government's tariff policy. In addition, the central bank must fend off suspicions that it is easing its monetary policy due to the White House's persistent push for low interest rates, thus losing its credibility in the financial markets.
In his recent remarks, Jerome Powell emphasized that the Fed prioritizes downside risks to the labor market over upside risks to inflation. This prioritization makes the state of the labor market the primary reason for the upcoming 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 returned to office, the Fed has been under great pressure to provide early stimulus for growth and employment.
How do consumers and companies react?
Consumer and business reactions to economic developments and policy measures paint a complex picture of caution and continued activity. These mixed signals are playing a key role in ensuring the US economy maintains 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, well 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 approximately 60 percent of respondents continued to cite tariffs as a major concern. 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 its December 2024 level and well below its historical average.
What is interesting, however, is the discrepancy between consumer confidence and actual consumption behavior. Many US citizens remained pessimistic between 2022 and 2024, 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 to $16,350.20 billion in the second quarter of 2025.
The key factor driving consumer behavior remains the labor market. As long as unemployment is low and incomes are rising, the overall wage bill increases. Since little savings are made 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 increase in fixed asset investment. Investments remain particularly robust in the technology sector, with major tech 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 showed a slight decline in sentiment among industrial companies, with sentiment indicators for incoming orders falling significantly, while companies simultaneously anticipate higher prices.
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What are the structural strengths of the US economy?
The resilience of the US economy to projected 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 decisive advantage. Unlike many European countries with rigid labor laws, US companies can adapt more quickly to changing economic conditions. This flexibility is reflected in their ability to react quickly to both upswings and downturns, which contributes to the overall stability of the system.
The US financial market boasts exceptional depth and liquidity. As 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 enables companies to maintain their investment plans even in uncertain times.
The innovative power 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 significantly driven forward by American companies. This innovative momentum continually 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 the energy sector, the US has a balanced economic structure that can absorb shocks in individual sectors.
The size of the American domestic market represents another structural advantage. With over 330 million inhabitants and one of the highest per capita purchasing powers in the world, 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 continually contribute to human capital development. The world's best universities attract talent from all over the world, ensuring a steady flow of qualified workers and innovative ideas.
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Tech to the rescue? How long will Trump's psychological boost for the economy last?
What risks still exist?
Despite the remarkable resilience of the US economy and the absence of a recession, significant risks remain that could jeopardize the economic balance. These risk factors require continued attention and could become more challenging in the second half of Trump's term.
Tariff policy remains a sword of Damocles 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 must plan their investment and employment decisions. Even if the quantitative inflationary effects are small, the uncertainty can dampen business spirits and lead to slower growth.
Migration 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 and simultaneously exacerbate inflationary pressures.
National debt is becoming an increasingly critical problem. The U.S. House of Representatives approved a $5 trillion increase in the debt ceiling, bringing it to well over $40 trillion. The U.S. is headed straight for a debt-to-GDP ratio of over 130 percent, in the same league as 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 the weakening labor market and containing potential inflation risks. Jerome Powell emphasized that there is no risk-free path for monetary policy. Any future interest rate decision could create new risks, and the Fed risks losing its 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 to future price increases.
How do experts assess the medium-term development?
Economic experts' assessments of the medium-term development of the US economy paint 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 2025 as a whole have stabilized. The Federal Reserve expects GDP growth of 1.6 percent for 2025, after lowering its forecast to 1.4 percent in June. Other forecasters are in similar ranges, with Trading Economics expecting long-term GDP growth in the US to be 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 historically low, the development signals a slowdown in labor market dynamics.
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 likely scenario as a strong recovery followed by a slowdown and even recession, as structural factors and policy measures could converge.
Inflation trends are increasingly worrying experts. While the immediate impact of the tariffs remained moderate, many analysts expect a gradual increase in price pressure. The Fed raised its own estimate of core inflation for 2026 from 2.4 percent to 2.6 percent, reflecting the growing concerns.
Experts warn of increasing fragmentation of the international trading system. Continuing trade conflicts and protectionist measures could lead to a fragmented global market that creates costs everywhere. This would harm 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 different 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 more resilient and diversified overall.
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What lessons can be learned?
The development 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 dire 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 migration policy, failing to adequately consider the dynamic adjustment mechanisms of the American economy. The US economy turned out to be more adaptable and dynamic than many models suggested.
A second lesson relates to the importance of expectation formation. Although consumer confidence declined significantly, actual consumer spending 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 communicative 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 labor markets, the capacity for innovation, and the depth of 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 call for caution against jumping to conclusions. The fact that a recession has so far failed to materialize does not mean that all risks have been averted. The medium-term challenges posed by rising debt, potential trade wars, and demographic changes remain and could become more serious problems in the coming years.
Experience also demonstrates the importance of a differentiated view of economic interrelationships. 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 respond flexibly to changing circumstances and adapt their strategies accordingly.
Ultimately, the Trump conundrum demonstrates that the American economy has 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 large extent by what German Economics Minister Ludwig Erhard recognized during the post-World War II economic miracle: "Economics is 50 percent psychology." This insight proves to be the key to understanding the "Trump conundrum"—why the American economy has demonstrated remarkable resilience despite gloomy expert forecasts.
The psychological factor manifests itself in several dimensions of the current US economic situation. First, Trump's communications strategy acts as a catalyst for economic expectations. His constant promises of economic recovery and a return of American jobs create a spirit of optimism among segments 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 despite uncertainties.
Paradoxically, Trump's disruption strategy also has a psychologically stimulating effect. While the constant announcements of new tariffs and policy reversals create uncertainty, they also create a form of "creative tension." Companies and investors are forced to react and adapt more quickly—which, ironically, reinforces the often-vaunted flexibility of the American economy. The expectation that things could change constantly leads to a greater willingness to act rather than paralysis.
The wealth effect plays a central role in the psychological dimension. Although stock markets have been volatile, long-term losses have been limited. Many Americans who are invested in stocks through their retirement accounts have not yet experienced dramatic losses. As long as portfolios remain stable, confidence in one's own financial situation remains – and with it, the willingness to consume.
The discrepancy between mood and behavior illustrates the psychological mechanism particularly impressively. While the University of Michigan's consumer confidence index fell to 55.4 points in September 2025, actual consumer spending rose from $16,291.80 to $16,350.20 billion in the second quarter. Americans talk pessimistically but continue to act optimistically – a classic example of how psychological factors are more complex than simple mood barometers suggest.
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Trump’s “America First” narrative
Trump's "America First" narrative creates a psychological identification with economic success. The message that America is "winning" again mobilizes emotional resources, which translate into increased risk-taking in investment and consumption 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 behave accordingly – and thus contribute to its 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 poses considerable risks. Economic psychology can quickly change if actual results deviate too significantly from expectations. As soon as unemployment rises noticeably or inflation places a significant strain on 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 inaccurate. 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 incorporate into mathematical models, yet often have a decisive influence on actual economic developments.
The Trump phenomenon impressively confirms Ludwig Erhard's insight: Psychology does indeed account for about 50 percent of the economy. As long as Trump manages to manage psychological expectations and maintain confidence in the economic future, his administration can compensate for even objectively problematic policy measures. The crucial question is how long this psychological effect will last and whether it will be strong enough to cushion even larger economic shocks.
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