The state of the US economy since January 2025

Here we present a neutral survey of the United States economy since President Donald Trump’s inauguration on 20 January 2025, and what these trends are likely to mean for domestic politics between now and the 2026 midterms.

The macro picture: a tariff whiplash followed by a steadier pulse

The first seven months of 2025 have already produced a striking pattern: a tariff-induced slump in the first quarter and a mechanical rebound in the second. Official national accounts show real GDP fell at an annualised rate of 0.5% in Q1 2025 as firms front-loaded imports ahead of new duties; imports, which subtract from GDP, then plunged in Q2 and, together with firmer consumption, helped headline growth bounce to 3.3%. In plain English, the arithmetic of trade flows exaggerated weakness and then strength. The underlying private-domestic demand proxy rose by a more modest 1.9% in Q2, a better guide to the true pace of activity. 

Inflation has cooled to something closer to the Federal Reserve’s comfort zone. Headline CPI (consumer price index) ran at 2.7% year-on-year in July with core at roughly 3.1%, implying disinflation but not quite mission accomplished. Real pay has finally turned positive on a 12-month view, up about 1.2% in July—welcome progress after the erosion of purchasing power in 2022–23. 

Labour-market temperature has dropped a notch. The unemployment rate edged to 4.2% in July, job creation slowed sharply with sizeable downward revisions to spring payrolls, and participation has drifted a little lower. Initial and continuing movements are not flashing crisis, but the balance of evidence is a cooler, thinner jobs engine than a year ago. 

Policy, markets and institutions

The Federal Reserve has held its policy rate steady at 4.25–4.50% in 2025 so far, but officials now openly signal that rate cuts are on the table as growth normalises and the labour market cools. Markets have taken the hint: rate-cut odds for September are high, and the dollar has weakened over August. 

Two further forces matter for both economics and politics. First, tariffs: independent estimates suggest the effective tariff rate after 2025 measures is the highest for over a century; the Q1–Q2 import whiplash visible in the GDP accounts shows how such policies can distort quarterly data while raising medium-term cost and supply frictions. Secondly, institutional pressure: the President’s unprecedented attempt to remove a sitting Federal Reserve governor—and his firing of the Bureau of Labor Statistics (BLS) commissioner—have ignited legal fights and a broader debate over statistical integrity and central-bank independence. Markets dislike politicised data and politicised money. 

Financial conditions have eased at the margin. Equities are near highs, aided by the prospect of easier money, while housing data show tentative improvement as mortgage rates slip from last year’s peaks; new-home sales and single-family starts in July stabilised and prices have softened from 2024 levels. That helps some households but underscores a two-track reality: asset-owners feel wealthier; renters and new buyers still confront dear housing. 

Household sentiment

Despite lower inflation and rising markets, households remain decidedly cautious. The University of Michigan’s August sentiment gauge fell back to 58.6, with expectations deteriorating. The simplest explanation is cumulative price fatigue: inflation is slower, but the price level is permanently higher, so people still feel squeezed. 

Likely political effects

1. Cost of living will decide swing voters. With inflation back near 2–3% but prices still high relative to pre-pandemic norms, the party that narrates a credible path to cheaper essentials—food, fuel, insurance, housing—has the advantage. Democrats will continue to prosecute a “cost of living first” message and to highlight any perception of political interference with official statistics. Republicans will claim success on disinflation and point to positive real wages; the test is whether voters feel it. 

   
   

2. Tariffs cut two ways. Protection resonates rhetorically in parts of the industrial Midwest, but broad-based tariff hikes are unpopular in national polling and can pinch exporters, farm states and firms reliant on global inputs. Expect Democrats to target tariff-exposed communities and small manufacturers; Republicans will argue tariffs are leverage to reshore supply chains. The electoral risk is that cost anxiety outweighs the promise of future industrial gains. 

   
   

3. The Fed and the fight over institutions. Legal battles around the attempted sacking of a Fed governor and the dismissal of the BLS chief are likely to mobilise educated suburban voters who prize institutional norms. If rate cuts arrive before year-end, the White House will claim vindication; if courts rebuke the administration, Democrats will contend that economic stewardship has been politicised. Either way, central-bank independence will become a live campaign theme rather than inside-baseball. 

   
   

4. The split screen: Wall Street v Main Street. A buoyant S&P 500 helps household wealth and retirement accounts, particularly among older and higher-income voters; but low sentiment, softer hiring and expensive housing can keep younger and lower-income voters sceptical. Expect Republicans to foreground indices and jobs “saved” by industrial policy; Democrats will keep attention on real wages, rents and healthcare out-of-pockets. 

   
   

5. Fiscal politics return. With the deficit still structurally large by historical standards, budget showdowns will re-emerge. Republicans may push spending restraint; Democrats will defend social and industrial programmes. Neither side can ignore debt-service costs if growth downshifts. 

From Macroeconomics to Political Shifts

Since January, the US economy has moved from a tariff shock to a slower, steadier expansion with falling inflation, softer jobs growth and hopes of rate cuts. The politics that follow are likely to hinge less on the impressive 3.3% headline for Q2 and more on lived experience: whether pay packets outrun prices, whether mortgages and rents ease, whether the tariff story feels like protection or a pocketbook tax, and whether voters believe the numbers they are being shown. On that terrain, close races in the Midwest and the Sun Belt will be decided not by aggregate charts but by confidence—economic and institutional—that can still swing either way.