How Strong is the U.S. Economy: Surprisingly Strong

The Reasons Why

When Trump announced huge tariffs last April, the financial markets did not react well at all and many economists expressed great concern about the effect on the economy. Despite the fact that tariffs remain at the highest levels since the Great Depression, the economy still seems quite strong, with GDP growing, unemployment remaining low, and inflation reduced to manageable levels.

So were the critics wrong?

There are many reasons why we have not seen much effects of tariffs. Importers anticipated the tariffs and stockpiled goods in inventory before the tariffs took effect. Consumers did as well. (My wife went to Total Wine and stocked up on French wine). This behavior is clearly shown in the GDP data for the first and second quarters.

While I expect that the economy will ultimately take a hit, we also need to consider another reason why the impact may not be huge: the U.S. economy has been quite strong in recent decades and can absorb even foolish policies such as the tariffs.

Perhaps the best way to see this is to compare how the U.S. economy has compared with Europe. In 2009, the European and U.S. economies were roughly the same size. In 2025, the U.S. economy is fast approaching being twice the size of the European economies. This is a stunning difference.

And this divergence is true of other economies as well. Our economy is doing better than the rest of the developed world.

In terms of growth, only China is a real competitor. In the past, economists had predicted that China would soon have a larger economy than the U.S. in a matter of years. The strength of the U.S. economy in recent years has pushed back the year that China’s economy will be the same size as the U.S. economy.

Even beyond growth, the U.S. economy shows great strength. We dominate in technology—Apple, Microsoft, Nvidia, Facebook, Google and Twitter are all homegrown US companies. Perhaps the biggest positive development in the past two years has been a surprisingly rapid increase in productivity. Austan Goolsbee, President and CEO of the Federal Reserve Bank of Chicago recently highlighted this development.

As Goolsbee notes, productivity growth “is probably the single biggest determinant of our standard of living” and “Compared with the trend of the 11 years before Covid, productivity growth since the end of 2022 has been notably faster.”

The result of all of this is that in the short term, our economy is strong enough to weather bad policy choices.

What about the long term? For that, we need to discuss why the economy is doing so well compared to the rest of the world.

To be far, some of this is just plain luck. We are a large integrated economy (far more integrated than the EU), and that makes us less dependent on foreign trade. We are also fortunate to have abundant natural resources. We are a net energy supplier—Europe, China, China and all the developed world except Canada and Australia are not.

But the strength of our economy is also the result of policy choices we have made, as well as our economic culture.

Our dominance in technology is no accident. It results from many factors: a world class system of research universities, a large federal investment in scientific research since the late 1940s, an entrepreneurial culture that encourages and rewards risk taking, and a robust system of venture capital. Simply put, compared to the rest of the world, we have people willing make huge risks—and venture capital firms willing to back them. We also have world class universities that are the incubators for the technology and business ideas that lead to innovator start-ups.

There is one other major factor in our economic success: immigration. Immigrants play an outsize role in U.S. innovation, as evidenced by their prominence in Silicon Valley and in the Boston-area biotech companies. NBER did an assessment of the contribution of immigrants to US innovation, and found that fully one fourth of all U.S. innovation came from immigrants. The National Foundation for American Policy did an assessment that estimated that immigrants started more than half of U.S. start-up companies valued at $1 billion or more.

So what does this suggest for the long term? We will remain lucky in our size and natural resources. I expect that we will remain dominant in venture capital and a risk-taking culture. When Democrats take back the Presidency, we may need to make sure that the populists among us don’t endanger the start-up and Venture Capital culture, but that is not a concern under Trump.

The other factors for our success, however, are very much in danger. Trump’s proposed budget would cut basic scientific research by more than one third, and cuts all science investments (applied as well as basic science) by about 22%. He has also stopped research in its tracks at some leading institutions, such as Harvard. Moreover, the Trump Administration’s hostility to foreign students is already affecting student enrollment as it did in his first term. This is important because foreign students are the pipeline that leads to the innovators and start-up founders driving innovation. And all of this is endangering the financial health of our major research universities.

In short, in the short-term, we have a robust economy that can likely weather stupid policies like tariffs. In the long term, however, the Trump Administration’s short-sighted policies may well undercut the key factors that make America’s economy great.