The Current Predicament of the US Economy: Escalating Tariffs, AI Bubble, and Policy Narrative Disconnection

The U.S. economy presents a picture of significant division. On one hand, the official narrative emphasizes strong growth, near full employment, and stabilized inflation; on the other hand, residents' actual purchasing power continues to decline, manufacturing jobs have been in negative growth for several months, consumer confidence is approaching historical lows, and core goods and energy prices are accelerating in their rise again. This phenomenon of “two realities” coexisting is rooted in the significantly upgraded comprehensive tariff policy since April 2025, as well as the decision-makers' systematic underestimation and redefinition of inflation facts. The latest data shows that the CPI in September rose to 3.0% year-on-year, a noticeable increase from 2.3% in April, while the October data has been delayed due to the government shutdown, further exacerbating market uncertainty.

1. Inflation Reality: Continued upward pressure from 2.3% to 3.0%

According to data from the U.S. Bureau of Labor Statistics (BLS), after the comprehensive tariffs take effect in April 2025, the CPI year-on-year rose from 2.3% to 3.0% in September, while the core CPI increased from 2.8% to 3.2%. Despite officials emphasizing that “inflation is under control,” the price pressure felt by residents far exceeds the numbers. The average increase in imported consumer goods (home appliances, electronics, clothing, toys) ranges from 12% to 20%, and some automobile parts have directly pushed up end prices by 6% to 10% due to steel and aluminum tariffs. Meanwhile, energy prices have risen again after a brief low, due to the U.S. imposing secondary sanctions on Russian oil, resulting in a reduction of about 7% in the actual available supply in G7 markets, while non-G7 buyers like China and India continue to purchase in large quantities at discounted prices, splitting the global oil market into a “G7 high-price zone” and a “non-G7 low-price zone,” with American consumers situated on the high-price side. On October 23, the U.S. Treasury announced sanctions against the two major Russian oil giants Rosneft and Lukoil, causing global oil prices to surge by 5% in the short term, with Brent crude temporarily breaking through $85 per barrel.

The direct consequence of inflation exceeding expectations is that the Federal Reserve's interest rate cut path has been completely disrupted. In September 2025, the Federal Reserve only symbolically cut rates by 25 basis points, and then held steady in three consecutive meetings. On November 25, the 30-year mortgage rate stabilized at 5.99%, down from 6.72% at the beginning of the year, but the housing affordability index still fell to its lowest level since 1985. Real disposable income for residents has seen negative growth for seven consecutive months after accounting for inflation, and the savings rate has dropped to 2.7%, below pre-pandemic levels. On platform X, user @SaltleyGates72 pointed out that while AI investment supports GDP, inflationary pressures are eroding the purchasing power of middle and low-income groups, leading to widespread dissatisfaction.

2. The Myth of Employment in the Manufacturing Industry is Shattered

One of Trump's core campaign promises for his second term was to bring manufacturing jobs back on a large scale through high tariffs. However, the actual data shows a completely opposite trend. From April to September 2025, the net decrease in manufacturing jobs in the U.S. was 58,000, with a decrease of 12,000 in August and 6,000 in September. There are three direct reasons for the decline in employment:

1. Input costs have surged dramatically. After the imposition of tariffs of 25% and 50% on steel and aluminum respectively, domestic steel prices in the U.S. are at a premium of over 30% compared to the global average, forcing companies to either bear higher costs or relocate production lines to countries exempt from tariffs;
2. Retaliatory tariffs. Canada, the EU, Mexico, and China have successively imposed reciprocal tariffs on U.S. agricultural products, machinery, and chemicals, resulting in a sharp decline in orders for export-oriented factories.
3. Uncertainty freezes investments. Industry surveys show that 78% of manufacturers list “trade policy uncertainty” as the biggest risk in the next 12 months, 68% are concerned about the continued rise in raw material costs, and 54% expect domestic demand to weaken. Capital expenditure plans have been significantly postponed or canceled.

At the same time, the highly anticipated “re-industrialization” has not appeared in traditional manufacturing, but has focused on data center construction. In the first three quarters of 2025, annual spending on data center construction in the United States has exceeded $40 billion, far surpassing the amount spent on traditional factory construction. This reflects a one-way shift of resources towards the AI and chip industries, while traditional manufacturing is being doubly squeezed: facing cost impacts from tariffs and unable to secure sufficient capital and policy support. Economist Stéphane Bonhomme commented on X that although tariffs are intended to protect domestic industries, they have unexpectedly accelerated the outflow of manufacturing, with September employment data confirming this “reversal.”

3. The Disconnection Between AI Bubble and Real Economy

The biggest structural feature of the current American economy is that capital, talent, electricity, and policies are all concentrated towards the AI and semiconductor industries. In the first half of 2025, the total capital expenditure of the seven giants, including NVIDIA, Microsoft, Meta, and Google, has exceeded $350 billion, and it is expected to surpass $700 billion for the entire year. The electricity consumption of data centers accounts for over 40% of the newly added electricity consumption in the U.S., and several states have issued electricity shortage warnings. To ensure electricity supply for the AI industry, some regions have begun to restrict electricity usage for residents and traditional industries. Harvard economist Jason Furman pointed out that AI investment contributed 92% of the GDP growth in the U.S. in the first half of 2025; if this contribution is excluded, the economy only grew by 0.1%, highlighting the risk of a bubble.

This resource allocation pattern of “everything giving way to AI” leads to the following consequences:

1. The financing environment for traditional manufacturing has deteriorated, and banks are more willing to allocate loan limits to high-rated tech giants;
2. The rise in electricity prices further increases the operating costs of the manufacturing industry;
3. Distortion of capital return expectations: The internal rate of return for data center projects is generally above 15%, while traditional factories only yield 4% to 6%, leading to a natural one-way flow of capital.

If the AI industry cannot deliver on its trillion-level profit promises in the next three years, once capital expenditure growth slows down, the United States will face a dual blow of “AI bubble burst” and “manufacturing hollowing out,” with extremely high systemic risk. User @karliskudla warns that AI-driven CapEx has pushed the U.S. PE10 to 40 times, similar to the peak of the tech bubble in 2000, with increased risks of capital outflow.

4. The Paradox of Fiscal Stimulus: The Inflation Trap of Tariff Dividend Checks

To alleviate the pressure of living costs on residents, the government plans to issue a $2,000 “tariff bonus check” to each household in 2026, with a total scale of about $600 billion expected. However, against the backdrop of an actual wage growth of only 3.9% and inflation reaching 3.0%, residents are likely to use this money to make up for the purchasing power gap rather than saving it. This will create a typical negative feedback loop of fiscal stimulus → demand pull → accelerated inflation → the Federal Reserve being forced to tighten. Data from the Atlanta Fed shows that wage growth in August 2025 is 4.86%, but the actual growth rate, after deducting inflation, is only 1.86%, which is even lower for low-income groups.

The more serious issue lies in the sources of financing. The $600 billion increase in the deficit must be resolved through bond issuance, while the current 10-year U.S. Treasury yield has risen to 4.8%. Prolonged high interest rates and high deficits will create a vicious cycle. The market has started to worry about the sustainability of U.S. debt, with the 30-year U.S. Treasury yield once approaching 5.2%, the highest since 2007. Comments on platform X, such as by @hc_Vnssa, point out that while tariffs bring short-term fiscal revenue, they amplify deficit pressures through retaliatory measures. The OECD predicts that overall growth in North America will only be 1.2% in 2025.

5. The Dual Collapse of Consumer Confidence and Actual Consumption Ability

The University of Michigan Consumer Confidence Index final value for November fell to 51, below the peak inflation level of 50.0 in June 2022 (when gasoline prices exceeded $5). The current economic conditions index has dropped to a 40-year low. Residents' evaluation of their personal financial situation has fallen to a five-year low, and the willingness to purchase big-ticket items is at its lowest since the financial crisis. The survey shows that inflation worries and tariff uncertainties are the main drag factors.

Retailers expect nominal sales during the holiday season in 2025 to rise by 3% to 4%. However, if inflation remains above 3%, actual sales will see zero growth or even negative growth. Companies like Walmart and Target have publicly stated that consumers are engaging in large-scale “trade down”: shifting from beef to chicken, from chicken to plant-based proteins, and from branded products to private labels. This downgrading behavior temporarily suppresses the CPI for certain categories, but in the long term, it will drag down corporate profit margins and tax revenues. User @2025Watcher criticizes that tariff policies have exacerbated the “trade down” phenomenon, with the actual income of middle-class households shrinking and the confidence index plummeting, confirming this trend.

6. The Dangerous Disconnection of Policy Narratives

What is currently most concerning is the systematic division between the official and public understanding of economic reality. The authorities repeatedly emphasize that “inflation is under control,” “economic growth is strong,” and “employment is close to historical highs,” yet they cannot explain why consumer confidence, housing affordability, manufacturing jobs, and real wage growth have all deteriorated. This disconnection between narrative and reality resembles the replay of the “transitory inflation” argument from 2021, except this time even the modifier “transitory” has been omitted. Commentators such as @Esaagar on X point out that while the AI bubble supports the stock market, it obscures the weakness of the real economy, and policies need to be cautious of the widening gap between the “two realities.”

If the decision-makers continue to insist on the judgment of “no problem with inflation,” the Federal Reserve will be forced to face a dilemma in 2026: either succumb to pressure to cut interest rates, leading to a disconnection of inflation expectations and a CPI returning to 4%-5%; or insist on fighting inflation, but high interest rates will completely crush the already fragile consumption of housing, automobiles, and durable goods, while exacerbating the burden of fiscal interest. Whichever choice is made, it could trigger a recession. Economic commentator Joanne Hsu warned in a report from the University of Michigan that the plummeting confidence index in November reflects policy failure and requires immediate adjustment.

Conclusion: The Trapped Economy and the Approaching Inflection Point

The current U.S. economy has fallen into a policy trap woven together by high tariffs, misallocation of AI resources, high deficit stimulus, and energy sanctions. Traditional manufacturing is being squeezed by high costs, residents' purchasing power continues to decline, and both fiscal and monetary policy space are constrained, while all growth hopes are pinned on the single bet of continued high growth in the AI industry. The latest BLS data and public opinion from platform X show that while tariffs bring short-term revenue, they amplify systemic risks through inflation and job losses.

Historical experience shows that when a country's economic growth overly relies on a single technological narrative and large-scale capital expenditure, while the real economy sector generally shrinks, it often indicates the approach of a significant adjustment. The internet bubble of 2000 and the real estate bubble of 2007 were both accompanied by the official narrative of “the new economy never declines.” Although the current AI boom is supported by genuine technological advancements, the scale of capital expenditure, resource concentration, and valuation levels have significantly exceeded the support from fundamentals. User @BenjaminNorton emphasizes that excluding AI, the U.S. economy is nearly at zero growth, and the bursting of the bubble will trigger a crisis.

Unless one of the following three situations occurs within the next six months, the probability of the U.S. economy falling into recession by 2026 will rise sharply:

1. The tariff policy has undergone significant adjustments, reducing the effective tax rates on intermediate goods and consumer goods;
2. The growth rate of capital expenditure in the AI industry has significantly slowed down, releasing electricity, capital, and talent back to the real economy;
3. The Federal Reserve drastically cut interest rates despite the risks of inflation, temporarily masking all cracks with liquidity (but this will lay the groundwork for a greater crisis).

Currently, none of the three show signs of implementation. Therefore, 2026 is likely to become the decisive year to verify the success or failure of the current policy mix. Before that, the U.S. economy will continue to struggle in two parallel realities of “official optimism” and “public suffering,” while the gap between the two realities is increasingly widening into an irreparable chasm. Economists need to be vigilant; policy adjustments cannot be delayed.