US economy: beneath the bombast

by Michael Roberts

Amid all the bombast and threats over Greenland in his Davos speech, US President Trump made a series of boasts about the success of the US economy, which was, of course, down to him. “Growth is exploding, productivity is surging, investment is soaring, incomes are rising, inflation has been defeated,” he told the gathering of the world’s political and financial elite. “We are the hottest country anywhere in the world.” (And he was not referring to global warming.) 

Trump said that the US economy was growing “phenomenally’ at over 4% a year in real terms and the forecast for the next quarter was even higher at over 5% a year.   Inflation was falling fast, allowing the Federal Reserve to cut its policy interest rate, which it should have done but for the reluctance of that ‘dumbo’ Fed chair Jay Powell, whom Trump was keen to say would be replaced very soon.  Under his presidency, he had reduced the bureaucracy of the federal government, getting rid of 270,000 federal jobs.  The Federal fiscal deficit was coming down fast.  And above all, he had stopped the influx of ‘illegal’ immigration that rocketed under Biden.  Now the US was ‘enjoying’ net emigration.

Well, let’s consider these claims.  US real GDP growth in Q3 2025 came in at annualised rate of 4.4%, the highest annualised rate in two years, and much higher than expected. This 4%+ growth seems tremendous – but the devil is in the detail. First, this is an annualised rate, meaning that the quarter over quarter increase was about 1.1% (tne multiplied by four to get an annualised figure. On a year on year basis (Q3 25 to Q3 24), real GDP growth was only 2.3%, slightly up from 2.1% in Q2.

Second, final sales to private domestic purchasers excludes trade and government, and so measures the state of the domestic private sector economy. That rose only 3% on an annualised basis. And year over year, growth was just 2.6%, down from 2.7% in Q2. So the apparent acceleration in real GDP growth was mainly due to net trade, and that was due to a reduction in imports from Trump’s trade tariff hikes.

Third, the growth in real GDP hides the fact that investment growth slowed to just an annualised rate of 1% in Q3, mainly due to a sharp decline in house purchases. And it was actually down 0.2% yoy. Business investment growth also slowed sharply from 9.5% in Q1, and 7.3% in Q2, to 2.8% in Q3, with investment in buildings falling absolutely and growth in information investment slowing by two-thirds after the breakneck pace of Q2 (15.0%). On a year on year basis (Q3 24 to Q3 25), productive investment growth was 4.0% yoy.

And then there is the comparison between real GDP growth and real gross domestic income (GDI) growth, the latter measuring income actually received by workers and capitalists. GDI rose only at a 2.4% annual rate in Q3 compared to the headline GDP figure of 4.3%. The GDI yoy rate was 2.4%, the same as real GDP growth yoy. As for the average Americans’ income, as measured by real personal disposable income (ie after tax), that was flat in Q3 and is up only 1.5% yoy, the slowest rate in three years.  So the headline growth figure that Trump boasted about is misleading. Underlying real GDP growth is much more modest, running just above 2% a year – not bad, but hardly blockbuster. And income growth for working families is slowing to a standstill.

It’s true that the Atlanta Fed GDPNow model estimate for real GDP growth for the fourth quarter of 2025 is an annualised 5.4%. And the year-on-year figure is likely to be higher than in Q3 because of the significant contraction in GDP in the first-quarter of 2025 due to the ‘front running’ of companies buying goods and services in advance of Trump’s Liberation Day tariffs that were imposed last April. Even then, year-on-year real GDP growth is likely to be under 3% a year, not 5-6% as Trump boasted.  

Moreover, this real GDP growth does not transfer into real income growth, especially for the majority of Americans. As many have argued, the US economy is K-shaped, meaning that rising incomes are confined to the top 10% of American income earners. Figures from the Bureau of Labor Statistics released earlier this month show that the labor share of the nation’s GDP hit the lowest point since the BLS began measuring such things in 1947. In that year, the labour share—that is, the pay and benefits that American workers claimed—stood at 70% of the nation’s income: “had the bottom 90 percent been able to retain their 1975 share of the nation’s taxable income, each of those workers would have seen their annual income boosted by $28,000.” No wonder consumer confidence among the bottom third of earners has dropped to its lowest on record.  

The reason that most Americans don’t feel the same about the US economy as Trump boasts is because of the rising cost of living, squeezing incomes. Trump claims that “inflation has been defeated”.  Yet the official consumer price inflation rate remains stubbornly high at 2.7% yoy, still some way above the US Federal Reserve target of 2%.  The so-called ‘core’ personal consumption expenditure inflation rate, closely followed by the Fed, is actually even higher at 2.8% yoy.  Food price inflation remains above 3% a year.  And as I have argued in other posts, the official inflation rate underestimates the real rate.

Will the inflation rate fall from hereon in 2026?  This is disputed. It seems that, so far, Trump’s import tariff hikes have not had a significant effect on consumer price inflation. But goods price inflation has reached its highest level since 2023, higher than at any point in the 2010s. Trump’s claim that these tariffs are paid by foreign exporters is, of course, nonsense. Tariffs are charged on imported goods when they land in the US. So US importers pay the tariff.  A recent study found that of 25 million import shipments worth nearly $4 trillion, foreign exporters absorbed just 4% of the tariff increases. In other words: for $100 in tariff revenue, ~$96 comes from American pockets. But it seems that importers (US manufacturers etc) are not yet passing most of this rise in tariffs onto American households.

The Peterson Institute reckons that in 2026 this will change and consumer price inflation will not fall, but accelerate to 4% a year. “The pass-through of tariffs to consumer prices has been modest to date, suggesting U.S. importers have been absorbing the bulk of the tariff changes. That will change in the first half of 2026. The many reasons for the lagged pass-through include businesses pricing based on when their inventories arrived (and have since run out) and concerns around being seen as raising prices too rapidly (so they are instead gradually increasing them).” 

If that were to happen, the Federal Reserve would be forced to consider raising its policy interest rate not reduce it, as Trump is demanding. Trump is demanding that the Federal Reserve cut its policy interest rate, which sets the floor for all borrowing rates in the US.  That’s because ‘inflation is defeated’.  He wants the current Fed chair, Jay Powell, out of his job.  Powell finishes his term in May and the likely replacement is to be BlackRock executive Rick Rieder, who, along with other Trump supporters, will aim to cut rates in the latter half of 2026.  But if inflation is rising by then, US treasury bond yields will also rise and the dollar will come under downward pressure – hardly good news for Trump just before the mid-term Congressional elections.