The stock market is up. Employment is down. Investments in artificial intelligence (AI) are booming. The economy is contracting.
Where exactly is the United States economy amid these contradictory signals? And, more importantly for workers and consumers, where is it headed?
The bottom line: The clouds hanging over the economy are darkening and gathering, economists say. But the size of the storm and its impact are not yet known. The policies of President Donald Trump and the nation’s central bank still have to play out.
Why We Wrote This
Recent economic indicators are sending diverging messages about the strength of the U.S. economy. America’s economic vitality may turn on upcoming tariffs.
“We are only beginning to get – with a lag – the impact of the first 100 days of the Trump administration” in the hard data, says Brett House, an economics professor at Columbia Business School. But the soft survey-based data that looks forward appears more ominous.
The latest piece of hard data came this morning. The U.S. Labor Department reported this morning that the nation created 177,000 new jobs, far more than what many analysts had expected. The unemployment rate remained steady at 4.2%.
U.S. Bureau of Labor Statistics
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Jacob Turcotte/Staff
Another positive piece of hard data for the administration: In March, U.S. retailers saw their biggest sales jump in more than two years. The potential challenge is that the administration’s trade policy may have skewed the numbers, analysts say. By threatening tariffs in April, consumers may have front-loaded their purchases ahead of the tariffs.
Even the negative data may not be as bad as it looks. This week, the Commerce Department reported that growth slid into negative territory in the first quarter of this year. That’s the first economic contraction since 2022.
But just as with the retail numbers, the threatened tariffs may have affected the GDP numbers, which measure the nation’s output of goods and services. The 0.3% decline was skewed by businesses and consumers loading up on imports before tariffs could make them more expensive, economists say. The underlying data looks more solid, as the White House was quick to point out.
“Today’s headline figure reflects the end of the Biden economic disaster, not the beginning of the economic boom that President Trump is delivering,” the White House said in a press release Wednesday. It touted robust growth in core GDP and the biggest jump in gross domestic investment in four years.
Here’s where expectations diverge. While the White House is touting a boom, consumers and businesses are expecting quite the opposite.
Manufacturing fell further into contraction in April, reaching a five-month low, according to a survey of manufacturers released Thursday by the Institute for Supply Management. “The signal remains bleak,” Matthew Martin, senior U.S. economist at Oxford Economics, wrote in a note.
Other soft, survey-based data also looks gloomy. Consumer confidence in current conditions has not changed much, the Conference Board think tank reported Tuesday. But their expectations for the future plunged to a 13-year low.
The major factor roiling the economy right now is the uncertainty surrounding President Trump’s tariffs. He has zigged and zagged, threatened big duties, then delayed them. This uncertainty is weighing on U.S. consumers and businesses. Until there’s more clarity on where tariffs ultimately fall, the former may well reduce spending, and the latter delay opening new stores and building new factories
Another key player in the economy’s future is the nation’s central bank, the Federal Reserve. Its decisions to raise or lower interest rates could have a huge impact on whether the economy avoids a recession. Even before Mr. Trump came into office, the Fed had been trying to cool the economy to bring down high inflation during the Biden administration. As inflation came down, it then began lowering interest rates.
Since Mr. Trump began imposing tariffs, the Federal Reserve has not bowed to pressure to lower interest rates. The tariffs are expected to increase inflation.
But the administration got good news on this front Wednesday. The Commerce Department reported that inflation dropped to 2.3% in March, down from 2.5% a month earlier. Similarly, closely watched core inflation, which strips out volatile food and energy prices, fell to 2.6%, down from 3.0%.
That means inflation is edging down to the Fed’s target of a 2.0% inflation rate. That could give the Fed more room to cut interest rates, something President Trump has been urging it to do. Lower rates make it cheaper to borrow money for building new factories and buying homes, helping to boost the economy.
Despite the overhang of tariffs, investment in AI appears intact. Major AI players Meta and Microsoft reported earnings Thursday that beat Wall Street expectations. They also committed to continued strong investment in the technology. Microsoft reaffirmed an $80 billion plan to build AI data centers. Meta said it was raising its AI investment target to $64 billion to $72 billion, up from $60 billion to $65 billion.
U.S. stock markets rose on the news.
