A quarterly review finds that the U.S. economy’s increasingly K-shaped nature is making American consumption patterns uneven and unpredictable. Despite continued growth, this and several other data points suggest a precarious economic situation could soon emerge.
Roger W. Ferguson Jr. is the Steven A. Tananbaum Distinguished Fellow for International Economics at the Council on Foreign Relations. Maximilian Hippold is a research associate for international economics at CFR.
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The longest government shutdown in U.S. history ended after weeks of political gridlock, but the impasse has already taken a toll on the U.S. economy. Federal employees and contractors missed paychecks, and many working-class Americans started to feel the effect of reduced funding for social programs, such as the Supplemental Nutrition Assistance Program (SNAP). The shutdown also generated a range of indirect costs: Farmers who depend on government data to plan crops or businesses awaiting federal loans and work visas all faced disruptions and the postponed publication of critical government data on the state of the economy further complicateconomic forecasting and decision-making.
According to the Congressional Budget Office (CBO), the economic cost [PDF] of the record-setting forty-three-day shutdown could range from $7 to $14 billion—losses that are permanent and will not be recovered through backpay or the release of federal funds after the shutdown ended. Some estimates go further, suggesting that 0.1–0.2 percentage points of annual gross domestic product (GDP) growth were shaved off each week that the shutdown continued.
This has set the backdrop for a challenging U.S. economic landscape. Businesses face high uncertainty due to a volatile tariff agenda, and U.S. partners and foreign firms exporting to or investing in the United States increasingly view Washington as a less reliable business partner. The U.S. economy’s K-shaped nature—where upper-income households thrive while middle and lower tiers struggle—makes American consumption patterns uneven and unpredictable for global manufacturers. Meanwhile, a large federal deficit (5.9 percent of GDP) and low household savings mean global savers are still called upon to finance U.S. growth, forcing their local investment needs to compete with the relative safety of U.S. markets.
Moreover, the future of U.S. tariff and trade policy remains unclear. Trade agreements with major partners such as Canada and Mexico are still unresolved, and next year’s planned renegotiation of the USMCA, the trilateral agreement with these two partners, is expected to carry significant implications for both global and domestic economic growth. Although the United States and China have agreed to ease some of their recent trade restrictions, underlying tensions persist.
Compounding this uncertainty is the U.S. Supreme Court’s review of tariffs imposed under the Donald Trump administration. A majority of the justices seemed skeptical of the legality of this measure, and a ruling against the administration could cast doubt on the future of U.S. trade policy and potentially undermine existing agreements. To better understand the variables at play, here’s a closer look at the finer points of the U.S. economy in detail.
Inflation currently stands at 3 percent, remaining above the Federal Reserve’s target of 2 percent. Although the Trump administration’s tariff policies did not significantly raise inflation—defying some economists’ predictions— many Americans continue to feel the toll of elevated prices. With the holidays around the corner, families are starting to grapple even more with higher prices for groceries or Christmas presents, which could further affect consumer spending and confidence. Core inflation—which excludes volatile food and energy components—also persists at a high level of 3 percent.
After a monthlong delay due to the government shutdown, the Bureau of Labor Statistics only released the data from the September jobs report on November 20. To the surprise of many after months of disappointing numbers, the U.S. economy added 119,000 jobs [PDF] in September. However, the unemployment rate increased to 4.4 percent—the highest in four years—likely indicating a cooling of the labor market.
Widespread deportations and tighter immigration restrictions, which have reduced the overall labor force, are contributing to this trend. In addition, major corporations such as Amazon, Target, and UPS have announced large-scale layoffs, likely driven by the increasing adoption of artificial intelligence (AI) technologies. The September job market report indicates that recent layoffs by major U.S. corporations have not yet had a significant effect on unemployment. Whether AI will trigger broader workforce displacement remains an open question in the months ahead.
Consumer and Business Confidence
CEO confidence edged down slightly, according to the latest release of the Conference Board Measure of CEO Confidence. At forty-eight, the index remains below the neutral threshold of fifty, indicating a generally pessimistic outlook. Executives expressed growing concerns about the broader economy, though many remain cautiously optimistic about conditions within their own industries.
Similarly, consumer confidence declined to its second-lowest level on record, reflecting persistent anxiety over high inflation, which continues to weigh heavily on household sentiment.
Fed Policy and Interest Rates
Despite inflation remaining above the Fed’s 2 percent target, the Federal Open Market Committee (FOMC) has opted to cut interest rates by 25 basis points, bringing the federal funds rate to a range of 3.75 to 4 percent. Minutes from the last FOMC meeting, along with the Summary of Economic Projections and Chair Powell’s post-meeting remarks [PDF] after the October meeting, underscore a cautious and divided Fed. In the absence of significant new developments, it is not guaranteed that the Fed will pursue another rate cut in December. With the labor market showing signs of cooling and inflation staying persistently high, the Fed faces a complex policy environment as the two sides of its dual mandate are pulling in opposite directions.
Growth
Second-quarter growth figures released in September indicate a solid expansion, putting the U.S. economy on track for 2 percent annual growth, according to International Monetary Fund estimates. While trade uncertainties and geopolitical tensions have weighed on economic performance, robust investment in AI and related infrastructure has provided a significant boost. This could also reflect that various trading partners have made commitments to invest hundreds of billions of dollars into the U.S. economy over the next years as part of trade settlements with the Trump administration. It remains unclear, however, when or if those investments will actually materialize.
Meanwhile, tech companies including Nvidia, OpenAI, and others have also pledged billions of dollars in U.S.-based investments over the coming years. A portion of this capital is already flowing into data centers, fueled by expectations that AI will fundamentally reshape the economy, enhance productivity, and unlock new opportunities. At the same time, a growing number of experts are cautioning that an AI-driven bubble could emerge, drawing parallels to the dotcom bust of the early 2000s.
Housing Market
U.S. house prices continue to climb, even as the housing market shows signs of strain. The turnover rate has fallen to a thirty-year low, reflecting a sharp slowdown in transactions. Many homeowners remain reluctant to lower their listing prices, while prospective buyers are deterred by persistently high interest rates. Treasury Secretary Scott Bessent recently described the sector as being in a recession, urging the Federal Reserve to continue cutting rates to support housing market activity.
Policy Spotlight: the U.S. Labor Market
The U.S. labor market is undergoing profound changes not seen in decades. The Trump administration has effectively closed the southern border and initiated one of the largest deportation efforts in American history. The last comparable campaign occurred under President Dwight D. Eisenhower in 1954. The sweep, officially termed “Operation Wetback,” led to the deportation of more than one million Mexican immigrants, some of which were U.S. citizens. While official figures cite high deportation numbers, historians have questioned their accuracy, noting that many deportees reentered the country shortly thereafter.
Nevertheless, to mitigate the resulting labor shortages at the time, the Eisenhower administration expanded the “Bracero Program,” which facilitated legal migration for agricultural work. In contrast, the current administration has not introduced comparable legal pathways to offset the labor market effect of its deportation policies.
Instead, Trump’s administration has limited other forms of immigration, including a newly announced policy that requires companies to pay $100,000 for each new H-1B visa application—a move expected to hit the tech sector particularly hard. Walmart, the nation’s largest retailer, has already announced a pause on all H-1B visa sponsorships in response. Piling onto a concern about tapping into foreign talent, tougher immigration enforcement has contributed to a 17 percent drop in international student enrollment this fall. Already dealing with government cuts to research funding, U.S. universities will now face even greater financial challenges.
The United States has long benefited from the immigration of highly skilled professionals—doctors, nurses, engineers—whose contributions have been especially vital in U.S technology and innovation. These are roles for which domestic supply remains insufficient. In the context of intensifying global competition, particularly with China, the potential harm from a shrinking pool of high-skilled workers—especially in the absence of a robust legal migration framework—raises serious questions about the future strength and competitiveness of the U.S. economy.
While the full effects of recent policy changes have not yet been reflected in the data, such policies are clearly contributing to a broader push to reduce the U.S. labor force. The effect will vary across sectors, but it appears set to effect both skilled and unskilled workers. The food trade—including growing, harvesting, processing—and the construction business are both industries that are reportedly facing significant labor shortages due to ramped-up immigration enforcement. Over the long term, the consequences appear poised to extend into other major U.S. industries, with changes such as the ones made to the H-1B visa.