- Paul Krugman warns the economy is "in worse shape than it looks," with hiring and investment frozen outside the tech elite.
- Tariffs and trade war policies are raising consumer prices, adding to inflation and harming supply chains and manufacturing.
- Economists see rising recession risk, growing long-term unemployment, and a K-shaped recovery worsening inequality.
WASHINGTON—On the surface, the U.S. economy under President Donald Trump’s second term looks like it’s humming along just fine.
Stock markets are up, unemployment hovers around 4%, and the White House is touting revised GDP figures showing 3.8% growth in the second quarter of this year.
But scratch a little deeper, and a growing chorus of economists is warning that things aren’t as rosy as they seem.
Nobel laureate Paul Krugman, never one to mince words, laid it out starkly this week, stating the economy is “in worse shape than it looks,” with erratic policies freezing up hiring and investment for everyone but the tech elite.
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Krugman, writing in his Substack newsletter, described a “K-shaped expansion” where the benefits of growth are skewing heavily toward the wealthy.
The AI boom and a surging stock market—up 15.8% year-to-date on the S&P 500 as of late October—are padding portfolios for the top 10% of households, who own 87% of all equities, according to Federal Reserve data.
The bottom half? They hold almost nothing.
“What looks like a fairly benign economy on the surface is actually hurting workers,” Krugman wrote, pointing to a hiring rate that’s plunged to levels reminiscent of the 2008 financial crisis.
It’s not just Krugman sounding the alarm. JPMorgan Chase CEO Jamie Dimon, in a recent Bloomberg interview, flagged a potential recession as early as 2026, driven by tariffs and market jitters.
“I shouldn’t say this, but when you see one cockroach, there’s probably more,” Dimon quipped during an earnings call, hinting at broader risks like a stock correction in the coming months.
And with long-term unemployment—those out of work for six months or more—jumping from 1.4 million in May to nearly 1.9 million by July, the cracks are starting to show.
Government Shutdown Further Complicates the Matter
Complicating matters, a government shutdown has stalled fresh federal data releases, leaving economists and investors piecing together an incomplete picture.
At the heart of these worries are Trump’s tariffs, which have escalated into a full-blown trade war this year.
Just this week, the president announced 130% tariffs on Chinese goods—later dialed back with exemptions for electronics at 20%—effectively embargoing much of the bilateral trade that powers U.S. supply chains.
The move is meant to boost domestic manufacturing, but critics argue it’s backfiring by jacking up prices for consumers.
A fresh analysis from the Federal Reserve Bank of St. Louis shows tariffs added 0.5 percentage points to the headline PCE inflation rate between June and August, pushing it to 2.85%.
Categories hit hardest include furniture, auto parts, and electronics—items Americans rely on daily.
Goldman Sachs estimates businesses could pass on up to 55% of those costs to shoppers, with the rest absorbed by companies or exporters.
The Yale Budget Lab crunched the numbers even starker: the average household could shell out an extra $2,300 annually, or about $191 a month.
A Guardian poll from mid-September underscores the pain: 75% of Americans reported monthly cost increases between $100 and $749, despite Trump’s “day one” pledge to slash prices.
Tariffs Start Biting Americans and Businesses
Even Republicans, while less likely to pin the blame on tariffs, aren’t immune—independents are now as frustrated as Democrats, a shift from last year’s polling under Biden.
“Tariffs are starting to bite consumers and businesses,” one St. Louis Fed economist noted, adding that price dynamics will keep evolving for months.
Krugman has been hammering this point for months.
Back in April, he called the initial tariff pause “worse” than the original hikes, arguing it sows uncertainty that chills investment in trade-sensitive sectors like manufacturing.
By August, he was warning of stagflation risks—high inflation paired with stagnant growth—echoing the 1970s.
“For 2025, I see little or no GDP growth, rising unemployment, and persistent inflation,” he told CNBC-TV18.
The tariff revenue—up to $195 billion in fiscal year 2025—has helped trim the budget deficit to $1.775 trillion, a slight dip from last year.
But that’s cold comfort amid soaring national debt, now over $36 trillion and climbing toward 120% of GDP.
Extending the 2017 tax cuts could add another $4 trillion to the tab, fueling more inflation and gap, according to Chatham House analysts.
Income gap, which dipped sharply under Biden, is rebounding under Trump, Krugman notes.
Real wages have ticked up slightly since January—especially for blue-collar workers—but not enough to offset the tariff-driven price hikes.
The administration touts manufacturing surges (up 1.8% in the first five months) and a “golden age” of growth, but Deloitte’s Q3 forecast sees business investment slowing to 3% next year amid higher rates and tariffs.
Recession Odds Grow
Even the Federal Reserve is wary. Chair Jerome Powell has held off on aggressive rate cuts, citing stubborn inflation that could worsen with more trade barriers.
Projections vary wildly: The Trump administration’s OMB sees GDP hitting 3.2% in 2026,while the CBO warns of unemployment creeping to 4.5% by year’s end.
Krugman puts recession odds above 50%, calling Trump’s playbook “crippling” to U.S. exceptionalism.
Krugman doesn’t see a full-blown recession yet—no mass layoffs like 2008—but the “frozen” state of the economy is already squeezing workers.
Businesses outside AI and luxury sectors are holding back on hires and expansions, spooked by “destructive instability” from policy whiplash.
“Even though we haven’t had a recession yet, the frozen state of the U.S. economy has already made life much worse for many workers,” he wrote.
“Many economists—actually, all the economists I know—are worried about a potential downturn,” Krugman added.
As the shutdown drags on, obscuring key data like September’s jobs report, Wall Street is left guessing.
Retail sales are softening, housing starts are at their lowest since 2020, and the dollar has slid amid tariff fears.
Trump, for his part, dismisses the doomsayers. In a recent Fox Business interview, he called the economy “explosive,” crediting tariffs for narrowing the trade gap.
But with consumer confidence dipping and polls showing widespread sticker shock, the administration’s sunny spin feels increasingly out of touch.
As we head into the final stretch of 2025, the big question is whether the AI-fueled highs can buoy the rest of the economy—or if the K-shape will deepen into a chasm.
For now, Krugman’s warning rings true: What you see isn’t always what you get.
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