The U.S. Economy Has Withstood Policy Shocks — for Now

By conventional wisdom, the U.S. economy should be buckling under the weight of four simultaneous policy shocks — sweeping tariffs, a collapse in net immigration, surging federal debt and repeated White House threats to monetary policymakers’ independence.

Instead, growth has continued, inflation remains contained by recent standards and financial markets have largely taken the turmoil in stride.

That paradox was at the center of a recent Brookings Institution webinar, “One Year of America First Trade Policy: What Did We Learn, and What Comes Next?” The webinar brought together economists and former trade officials to assess why dire predictions have thus far failed to materialize — and whether the apparent resilience will last.

“Any one of these shocks is significant, and collectively they are extraordinary,” Ben Harris, vice president and director of economic studies at Brookings, said during his opening remarks. “If you locked 100 economists in a room one year ago and informed them of these developments today, virtually all would have projected the U.S. economy would be stagnant at best and cratering at worst.”

The first shock came from trade. Average tariff rates surged from about 2.4 percent at the start of President Donald Trump’s second term to a peak near 28 percent in April, Harris said, levels unseen in decades. Those moves were paired with a more confrontational foreign posture, including tariff threats tied directly to geopolitical disputes.

The second shock was immigration. Brookings research estimates net immigration in 2025 fell to somewhere between roughly zero and minus 295,000 — a dramatic departure from the typical annual inflows of 500,000 to 1.5 million workers that helped meet U.S. labor demand for decades.

A third shock arrived via fiscal policy. The administration’s signature tax and spending package, the “One Big Beautiful Bill,” is projected by the Urban-Brookings Tax Policy Center to add US$4.2 trillion to the national debt over the next decade, pushing primary deficits higher even outside recession or war.

The fourth, and most destabilizing in theory, was pressure on the U.S. Federal Reserve (Fed). Harris cited repeated White House calls for lower interest rates, efforts to remove sitting Fed officials and a Justice Department inquiry involving Fed chair Jay Powell.

A Matter of Timing

So, why hasn’t the economy stalled? Harris outlined four possible explanations, beginning with the possibility that the shocks are smaller than they appear.

While statutory tariffs are high, actual collections have risen by less than $200 billion, a painful but manageable hit in a $30 trillion economy. Trading partners have responded cautiously, muting retaliation. And despite political pressure, the Fed’s policy decisions have not yet departed sharply from past practice.

Another explanation is offsetting stimulus. Large fiscal deficits have boosted disposable income, while surging investment in artificial intelligence has provided a meaningful lift to growth. The St. Louis Fed estimates the AI boom added roughly 2.5 percentage points to GDP growth. Still, Harris said, those offsets only partly explain the outcome, noting that some fiscal benefits will not fully reach households until 2026.

A third possibility is more uncomfortable for economists: that long-held assumptions could be incomplete. Harris stressed humility, arguing the size and diversity of the U.S. economy might enable it to buffer shocks longer than models predict.

Even so, key indicators have worsened modestly since Trump took office, including higher unemployment, rising inflation in non-housing services and wider risk premiums in Treasury markets.

The final — and, to Harris, the most convincing — explanation is timing.

“It simply takes time for these shocks to move through the system,” he said, pointing to research showing (1) immigration boosts productivity over years, not months, and (2) the costs of higher debt and weakened central bank credibility accumulate gradually.

‘Different Objectives’ on Tariffs

Panelists agreed that tariffs are already raising prices, though more slowly and unevenly than feared.

Wendy Edelberg, senior fellow in economic studies at Brookings, said careful analysis suggests current tariffs have lifted consumer prices by about 0.5 percentage point so far, with more increases likely through 2026 as companies exhaust workarounds.

“Imported goods subject to these tariffs are indeed showing higher prices,” Edelberg said, adding that domestic competitors are also raising prices as foreign goods become more expensive.

She emphasized that effective tariff rates paid are closer to 15 percent, below the statutory rate of roughly 18 percent, reflecting trade diversion, compliance loopholes and exporters temporarily absorbing costs to preserve market share.

Kelly Ann Shaw, a White House trade adviser during the first Trump presidency, defended the administration’s approach as more targeted than critics acknowledge. She argued that tariffs serve multiple purposes, including forcing reciprocity, protecting national security supply chains and advancing foreign policy goals.

“These are different tools designed to achieve different objectives,” Shaw said.

But former Biden administration official Nora Todd warned that, since Congress has retreated from trade policymaking, too much power is concentrated in the executive branch, producing an outdated and blunt toolkit.

“Our objectives are not based on a fully deliberative national conversation,” Todd said, calling for lawmakers to reclaim authority and modernize trade policy.

China Makes Power Play

Looking overseas, Rhodium Group co-founder and partner Daniel H. Rosen said China emerged from 2025 in a stronger position. After testing the limits of U.S. pressure, Beijing leaned back on export-led growth, exploiting its dominance in critical minerals and benefiting from fractured coordination among U.S. allies.

“China confirmed it could transship around U.S. measures and keep exports flowing,” Rosen said, while U.S. policy toward allies became more confrontational than toward Beijing by late 2025.

That dynamic, panelists warned, risks weakening long-term U.S. leverage even as short-term economic damage appears contained.

The bottom line, Harris concluded, is sobering. “I hope I’m wrong,” he said, but if the policies persist, “their impact will likely be more damaging than what we have observed so far.”

(Photo credit: Getty Images/Fly View Productions)