Photograph by Nathaniel St. Clair

It’s easy to look at the Trump administration and point to all the serious economic mistakes it is making. However, economic mistakes do not necessarily lead to a recession and certainly not to a crash, as some critics seem to expect.

In fact, some of the economic mistakes are offsetting. A bad policy in one direction, say big tax cuts for rich people, may offset a bad policy in the other direction, say cutting Medicaid and research funding. The former raises the risk of too much demand, while the latter reduces demand both directly and indirectly. While it is easy to attack both policies, the problems at least from an economic perspective (we don’t need to give rich people more money and power) are largely offsetting, at least in the near term.

Before looking more closely at the economic picture at the Trump administration’s six-month mark, it’s worth stepping back and reminding everyone how slowly a disaster can be in developing. I was watching the housing bubble grow from 2002. It was clear that it was driving the economy, both from a huge surge in housing construction and also from consumption driven by the housing equity generated by the bubble.

Having first been convinced that the run-up in prices was a bubble in the summer of 2002, as in not driven by the fundamentals in the housing market, I expected that it would soon peak and start to reverse course as the stock bubble did in 2000. Contrary to my expectations, it continued to grow until the summer of 2006.

Prices grew far higher than they had been in 2002 when I first became convinced of the bubble. The bad lending practices that were already visible in 2002 exploded to the point where they had become a joke within the industry. People in housing finance openly talked about “liar loans” and NINJA loans, which stood for “no income, no job, no assets.”

To be clear, the lying was driven at least as much by the lenders as the borrowers. We had created a system of securitization where the profit was derived from issuing the loan, not from having a homeowner who would repay it. Mortgage issuers were happy to issue loans that they had no reason to expect would be repaid because they knew they could resell just about anything in the secondary market.

Anyhow, the fun pretty much ended by the summer of 2006. That was when the subprime market largely froze, and house prices began to drift lower. However, the economy remained healthy, growing 2.8 for the full year. The growth even continued through most of 2007, which registered 2.0 percent growth for the full year.

We stopped creating jobs in December of 2007 and the recession gradually gained speed in 2008 as the trickle of bank failures turned into a monsoon. By October, we had the Treasury Secretary, accompanied by the Fed chair and head of the New York Federal Reserve Bank, running to Congress demanding hundreds of billions to bail out the banks, warning that without the money it would be the end of capitalism.

This was a long trip down memory lane, but the point is that even when you have a clearly disastrous situation, it takes a long time for the impact to be felt. The US economy is often compared to an oil tanker at sea, which takes many miles to slow and bring to a stop. Even that analogy probably understates the force of economic momentum, and the US economy had lots of momentum going into 2025, a point that even the media can acknowledge now that the election is behind us.

Where Are We Now?

It’s a bit bizarre that many commentators talk as though the economy is still sailing along just fine. While we are not in a recession, the economy did shrink by 0.5 percent in the first quarter. There were unusual factors driving that fall. Imports soared as households and businesses stocked up on imported goods ahead of anticipated tariffs. But there is no way that anyone can beat up the data for the quarter and come up with a good story.

Job creation has slowed sharply. We had been creating jobs at a 170,000 monthly rate through 2024. In the first six months of this year job growth averaged just 130,000 a month. To be clear, this slowing is largely due to the tightening immigration restrictions, which began last June under Biden, but it still translates into slower growth in demand and the economy.

There also is some evidence that wage growth has slowed. The annualized rate of growth, comparing the last three months (April-June) with the prior three (January-March), is just 3.2 percent, down from a 4.0 percent pace in 2024. This averaging is my preferred measure of wage growth, since it reduces the impact of a single month’s data, which is erratic. Nonetheless, the extent of slowing may look different with another month’s data.

There is also some evidence that tariffs are starting to have an impact on inflation. While the Consumer Price Index (CPI) is still relatively tame, the downward trend we saw through 2024 seems to have been reversed. June was the first month where the government collected substantial revenue from Trump’s tariffs, pulling in $26 billion compared to $6 billion last June.

The difference of $20 billion comes to $240 billion annually, which makes it one of the largest tax increases in history. Summing this over ten years, as is the standard in budget calculations, it comes to $2.4 trillion. On a per household basis this comes to $1,900 a year or $19,000 over a decade. That’s real money for most........

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