The U.S. Economy at Risk: A Self-Reinforcing Downturn on the Horizon?
The U.S. economic growth rate is softening, and equity markets are experiencing sharp declines. However, President Trump remains unfazed, dismissing these developments as a temporary dip before an imminent economic boom. While we sincerely hope this outlook proves correct, we see a growing risk in the opposite direction: a self-reinforcing downturn in the American economy.
Trump’s vision is to build a significantly stronger U.S. industrial sector that can compete head-on with China. This is an ambitious objective, considering that manufacturing accounts for less than 20% of the U.S. economy and primarily involves products that are past their peak in the industry lifecycle.
The Path to a Stronger Industrial Base
Ideally, strengthening U.S. industry would involve making existing companies more efficient and fostering innovation to create globally competitive products. This could be achieved by investing in workforce education, infrastructure, and research and development. However, Trump’s primary tool of choice is tariffs—making foreign competition more expensive.
Trump expects that companies currently manufacturing abroad will shift production back to the U.S. This could happen to some extent, but it is unlikely to be significant. The president has already demonstrated that he can impose or lift tariffs at a moment’s notice, creating uncertainty for businesses. More importantly, shielding U.S. companies from foreign competition could reduce their incentives to improve efficiency or innovate.
A historical precedent offers a cautionary tale: Japan pursued a similar protectionist strategy decades ago, only to fall behind in key technological advancements such as the internet and other emerging industries. The result was decades of economic stagnation.
The Deficit Dilemma
Another critical concern is the U.S. government deficit, which, as a percentage of GDP, is expected to increase rather than decline. Trump believes that, despite the current deficit of approximately 7% of GDP, it will be reduced to 0% by 2029. His assumption is that rapid economic growth will generate sufficient tax revenues to eliminate the shortfall. However, most economists disagree, particularly given the demographic challenges the U.S. now faces. Aging demographics, coupled with restrictive immigration policies and mass deportations, will likely slow economic growth. At the same time, government spending on elder care will rise significantly.
In short, there is a considerable risk that the deficit will remain high and could expand further due to rising interest expenses. If debt levels continue to escalate, significant spending cuts will become necessary, which would further dampen growth. This concern is already materializing, with high debt levels driving up credit spreads and making risk financing more expensive—another drag on economic momentum.
The Current Situation: Early Signs of Trouble
Trump has only just begun implementing certain tariffs, yet economic growth is already slowing, and stock markets are tumbling. The bulk of these trade measures is expected to take effect later this year, exacerbating economic uncertainty.
Both the EU and China have responded with retaliatory tariffs, creating uncertainty for businesses and consumers alike. This trade friction will also contribute to inflationary pressures, limiting the Federal Reserve’s ability to cut interest rates and possibly forcing it to raise them instead.
Compounding these risks, geopolitical tensions are rising. Supply chains are becoming less predictable, and firms must reconsider optimal production locations—factors that further constrain growth.
Additionally, the U.S. total debt-to-GDP ratio is near record highs. This means the Fed has little room to quickly lower interest rates in the event of further economic weakness, as doing so could trigger a self-reinforcing negative spiral. Credit spreads are already widening, signaling higher risk premiums and further slowing growth.
Conclusion: A Dangerous Path Ahead
Unless Trump’s policies are significantly adjusted—an outcome we estimate at only a 10% probability—the U.S. economy is heading into a precarious period.
But does this also apply to Europe? We think not. In contrast to the U.S., European fiscal stimulus is set to increase, and the ECB is likely to implement additional rate cuts. This combination could sustain European economic growth at around 1–2% annually.
For a detailed analysis of the potential market impact, please refer to our latest GFM report. A free 40-day trial is available for those interested in deeper insights.
Have a great weekend!
