The Mystery of the Strong Economy Has Finally Been Solved

The Atlantic

20 hours ago

The Trump economy doesn't look so hot after all. This morning, the Bureau of Labor Statistics released revised data showing that, over the past three months, the U.S. labor market had experienced its worst quarter since 2010, other than during the first year of the coronavirus pandemic. The timing was awkward. Hours earlier, President Donald Trump had announced a huge new slate of tariffs, set to take effect next week. He was emboldened by the fact that the economy had remained strong until now despite economists' warnings—a fact that turned out not to be a fact at all.
After Trump announced his first sweeping round of 'Liberation Day' tariffs, in April, the country appeared to be on the verge of economic catastrophe. The stock market plunged, the bond market nearly melted down, expectations of future inflation skyrocketed, and experts predicted a recession.
But the crisis never came. Trump walked back or delayed his most extreme threats, and those that he kept didn't seem to inflict much economic damage. Month after month, economists predicted that evidence of the negative impact of tariffs in the economic data was just around the corner. Instead, according to the available numbers, inflation remained stable, job growth remained strong, and the stock market set new records.
The Trump administration took the opportunity to run a victory lap. 'Lots of folks predicted that it would end the world, there would be some sort of disastrous outcome,' Stephen Miran, the chair of Trump's council of economic advisers, said of Trump's tariffs in an interview with ABC News in early July. 'And once again, tariff revenue is pouring in. There's no sign of any economically significant inflation whatsoever, and job creation remains healthy.' A July 9 White House press release declared, 'President Trump was right (again),' touting strong jobs numbers and mild inflation. 'President Trump is overseeing another economic boom,' it concluded.
The seemingly strong data spurred soul-searching among journalists and economists. 'The Economy Seems Healthy. Were the Warnings About Tariffs Overblown?' read a representative New York Times headline. Commentators scrambled to explain how the experts could have gotten things so wrong. Maybe it was because companies had stocked up on imported goods before the tariffs had come into effect; maybe the economy was simply so strong that it was impervious to Trump's machinations; maybe economists were suffering from 'tariff derangement syndrome.' Either way, the possibility that Trump had been right, and the economists wrong, had to be taken seriously.
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The sky's refusal to fall likely influenced the Trump administration's decision to press ahead with more tariffs. In recent months, Trump has imposed 25 percent tariffs on car parts and 50 percent tariffs on copper, steel, and aluminum. He has threatened 200 percent tariffs on pharmaceuticals. Over the past week, Trump announced trade deals under which the European Union, Japan, and South Korea agreed to accept a 15 percent tariff on exports to the U.S. Finally, this morning, he announced a sweeping set of new tariffs, a sort of Liberation Day redux, including a 39 percent levy on Switzerland, 25 percent on India, and 20 percent on Vietnam. These are scheduled to take effect on August 7 unless those countries can negotiate a deal.
Then came the new economic data. This morning, the BLS released its monthly jobs report, showing that the economy added just 73,000 new jobs in July, well below the 104,000 that forecasters had expected, and unemployment rose slightly, to 4.2 percent. More importantly, the new report showed that jobs numbers for the previous two months had been revised down considerably after the agency received a more complete set of responses from the businesses it surveys monthly. What had been reported as a strong two-month gain of 291,000 jobs was revised down to a paltry 33,000. What had once looked like a massive jobs boom ended up being a historically weak quarter of growth.
Even that might be too rosy a picture. All the net gains of the past three months came from a single sector, health care, without which the labor market would have lost nearly 100,000 jobs. That's concerning because health care is one of the few sectors that is mostly insulated from broader economic conditions: People always need it, even during bad times. (The manufacturing sector, which tariffs are supposed to be boosting, has shed jobs for three straight months.) Moreover, the new numbers followed an inflation report released by the Commerce Department yesterday that found that the Federal Reserve's preferred measure of price growth had picked up in June and remained well above the central bank's 2 percent target. (The prior month's inflation report was also revised upward to show a slight increase in May.) Economic growth and consumer spending also turned out to have fallen considerably compared with the first half of 2024. Taken together, these economic reports are consistent with the stagflationary environment that economists were predicting a few months ago: mediocre growth, a weakening labor market, and rising prices.
The striking thing about these trends is how heavily they diverge from how the economy was projected to perform before Trump took office. As the economist Jason Furman recently pointed out, the actual economic growth rate in the first six months of 2025 was barely more than half what the Bureau of Economic Analysis had projected in November 2024, while core inflation came in at about a third higher than projections.
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The worst might be yet to come. Many companies did in fact stock up on imported goods before the tariffs kicked in; others have been eating the cost of tariffs to avoid raising prices in the hopes that the duties would soon go away. Now that tariffs seem to be here to stay, more and more companies will likely be forced to either raise prices or slash their costs—including labor costs. A return to the 1970s-style combination of rising inflation and unemployment is looking a lot more likely.
The Trump administration has found itself caught between deflecting blame for the weak economic numbers and denying the numbers' validity. In an interview with CNN this morning, Miran admitted that the new jobs report 'isn't ideal,' but went on to attribute it to various 'anomalous factors,' including data quirks and reduced immigration. (Someone should ask Miran why immigration is down.) And this afternoon, Trump posted a rant on Truth Social accusing the BLS commissioner of cooking the books to make him look bad. 'I have directed my Team to fire this Biden Political Appointee, IMMEDIATELY,' he wrote. 'She will be replaced with someone much more competent and qualified.' He then went on to argue, not for the first time, that Federal Reserve Chair Jerome Powell should be fired for hamstringing the economy with high interest rates. These defenses are, of course, mutually exclusive: If the bad numbers are fake, why should Trump be mad at Powell?
In these confused denials, one detects a shade of desperation on Trump's part. Of course, everything could end up being fine. Maybe economists will be wrong and the economy will rebound with newfound strength in the second half of the year. But that's looking like a far worse bet than it did just 24 hours ago.